Top 5 Reasons for Alternative Investing

April 10, 2021

Written by

Josh Will

1. Diversification

It's important to broaden your investment horizon and add diversification to your portfolio. First and foremost, it lessens overall risk as you're not dependent on the success (or at risk of the failure) of a single asset, stock, or wherever you've invested heavily.

Everyone is familiar with the notion of "hedging your bets" and diversification is the prime example of this. You can be more comfortable with a promising but riskier investment when you have more stable Investments to counter that risk, should it comes to pass.

2. Higher Returns

Because they’re less commonplace and usually more broadly distributed, alternative Investments can often yield higher returns, simply due to there being fewer investors sharing a larger opportunity.

Historically typically available only to institutional investors, such as pension funds and foundations, or often wealthy individuals, alternative Investments are making their way into the mainstream with SPACs, NFTs, and cryptocurrencies, as examples, to allow everyday investors more opportunity to reap their benefits.

Here's a great write-up on NFTs (non-fungible tokens) and where they might be going.

3. Control

Traditional IRAs are by definition, just that, traditional. Which means they typically consist of stocks, bonds, mutual funds, etc. Whereas something like a self-directed IRA, you have much more control (and yes, risk) in what is held.

For example, one self-directed IRA might include a private business or a specific real estate holding, while another maintains investments in cryptocurrency, water or mineral rights or other Investments. The variety is pretty endless.

Take a look at this primer on self-directed IRAs from NerdWallet.

4. Tax Benefits

As the IRS always looks to get its share, alternative Investments offer another way to keep more of your money by essentially making you a partial owner of a fund or asset, and allowing you to reap the benefits of pass-through depreciation and long-term capital gains.

In the former, many funds in real estate will deduct depreciation expense for income thereby reducing taxable income. Areas like oil and gas especially have favorable depreciation tax treatment.

For mortgage holdings, the interest payments can be sizable. Passive income gained is great for cash flow, but also allows for the deduction of those payments come tax season.

5. Tangible Assets

Everyone is familiar with the image of Scrooge McDuck diving into a small mountain of gold. Mr. McDuck appears to be a big fan of tangible assets. Something he could see and touch.

The same goes for antiques, art, and other collectible items. If you have your eye set on that classic ‘66 Karmann Ghia to start your auto collection, their value is rising. Besides personal enjoyment, you're certain to see some investment benefits thanks to adding such diversification to your portfolio. In addition, tangible assets have long been seen as the go-to investment as long-term protection against inflation.

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