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Building an Investment Portfolio: Unconventional Assets, Strategies for Investors

Published 02/16/2024, 04:01 AM
Updated 02/16/2024, 04:11 AM
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Remember when the GameStop (NYSE:GME) frenzy caught Wall Street by surprise?

It showed us that the stock market could sometimes play by unexpected rules. It's a clear sign that just sticking to the usual stocks and bonds might not be enough anymore.

That's why it's time to think outside the traditional box and get to know unconventional assets and strategies.

Conventional investments are familiar – think shares in big companies, government bonds, or your typical savings accounts. They're the foundation of most investment portfolios.

However, unconventional assets, like cryptocurrencies or peer-to-peer lending, are the new kids on the block, adding a new layer of protection and potential growth to your portfolio.

Building a robust investment portfolio today means mixing the old with the new – pairing traditional investments with modern ones to stay ahead. Ready to build an investment portfolio that's fit for the future? Let’s dive in.

Pre-Investment Considerations

Before jumping into the exciting world of unconventional investing, it's important to lay a strong foundation. Today's market isn't just about picking winners; it's about understanding your own financial landscape and how different assets fit into it.

Here’s how to get started:

  • Gauge Your Risk Appetite: Use online risk tolerance questionnaires from reputable financial services to pinpoint where you stand. For a hands-on approach, consider talking to a financial advisor who can help you quantify your risk profile through established assessment methods.
  • Chart Your Financial Goals: Start by writing down your short and long-term financial objectives. Use goal-setting apps or financial planning software to outline and quantify these goals. Tools like Mint or PocketGuard can help you visualize and track progress toward each milestone.
  • Conduct Thorough Research: Dive into each asset class by subscribing to specialized financial news platforms, reading up-to-date market analyses, or taking online courses on investment platforms like Coursera or Udemy that offer in-depth insights into various asset classes.
  • Align Investments with Your Timeline: Utilize financial calculators available on sites like Bankrate or Investopedia to simulate investment growth over time and plan your asset allocation accordingly. This will help you understand the potential outcomes based on different time horizons.
  • Stay Informed About Costs: Familiarize yourself with fee structures by using comparison tools offered by FINRA or Morningstar to evaluate the costs associated with different investments and ensure they fit within your budget and investment plan.

Emerging Unconventional Asset Classes

In an ever-evolving marketplace, unconventional assets have become more than just buzzwords – they are the new frontier for investors looking to broaden their horizons.

These aren't your typical stocks and bonds or stock diversifications; unconventional assets include anything from digital currencies changing the face of money to art pieces that hold historical value.

They are the assets that challenge traditional market behaviors, often moving independently of the stock market's ebb and flow, offering a fresh avenue for growth and diversification. Below, we explore some of the top unconventional assets and how they fit into your investment portfolio:

Cryptocurrencies

Cryptocurrencies have evolved from a novel digital experiment into a diverse and significant asset class, capturing the interest of both individual and institutional investors.

Influential celebrity tweets and important regulatory updates have influenced crypto’s prominence and appeal, shaping public perception and acceptance.

For the modern investor looking to expand their portfolio, cryptocurrencies provide growth potential and a hedge against traditional market downturns. Here's a guide to getting started with this unconventional asset class:

  • Start with Education: Look for beginner-friendly guides that explain how cryptocurrencies work, what blockchain is, and the basics of buying and trading. Coinbase (NASDAQ:COIN) offers an interactive learning experience where you can earn small amounts of crypto by watching short videos and taking quizzes. Binance Academy provides articles and tutorials ranging from beginner to advanced levels.
  • Monitor Trends: Keep an eye on trading volumes and adoption rates. News about technological upgrades (like Ethereum's move to Proof of Stake) or major companies investing in or accepting cryptocurrencies (like Tesla (NASDAQ:TSLA)'s investment in Bitcoin) are also key indicators of market movement.
  • Use Trusted Exchanges: Start with exchanges that not only offer secure trading but also provide educational resources for beginners. For instance, Coinbase has a user-friendly interface and provides simple explanations of each cryptocurrency it offers. Binance features a variety of tools for tracking and analyzing your investments, helping beginners to make informed decisions.
  • Consider Diversification: By investing in different cryptocurrencies, you spread your risk. For example, Bitcoin is known for its strong brand and market presence, while Ethereum offers a platform for decentralized applications, diversifying its use cases. Altcoins like Litecoin and Ripple have different transaction speeds and costs, which can offer varied investment opportunities and risks. This diversification within crypto can provide a buffer against the volatility of any single cryptocurrency.
  • Be Security Conscious: Think of a hardware wallet as a personal vault. Devices like Ledger or Trezor keep your cryptocurrency offline, making it less vulnerable to online hacking. They give you control over your digital assets, with robust security features to protect them.
  • Follow Regulations: Keep an eye on the news for any government decisions about cryptocurrencies, as these can affect their value. In the U.S., watch out for updates from the IRS or the SEC on how they're classifying and regulating them. For example, the IRS currently treats cryptocurrencies as property for tax purposes, meaning any profits from their sale are subject to capital gains tax. The SEC's stance, especially on whether certain cryptocurrencies are classified as securities, can influence market behavior and investor protection.

Real-Estate Investment Trusts (REITs)

Real estate investment trusts are an avenue to invest in real estate without the hassle of buying property directly. REITs are companies that own, operate, or finance income-generating real estate, such as retail, residential, healthcare, corporate, industrial, hospitality, and specialty properties.

By investing in shares of a REIT, you get a slice of the income produced from these diverse property types without the need to directly buy, manage, or finance any properties yourself. REITs often pay out a good chunk of their earnings as dividends to shareholders, making them attractive for those seeking regular income.

Additionally, one of the key advantages of REITs in a portfolio is their potential to offer diversification. Unlike conventional assets, the performance of REITs is often not directly tied to stock market movements.

This means that even when the broader stock market is experiencing a downturn, some REITs, particularly those in recession-resistant sectors, might still maintain stable performance or even see growth.

Recent market trends have indicated positive performance for REITs that focus on industrial properties like warehouses and distribution centers. Most notably, this shift is the result of rising e-commerce and online shopping demand.

For newcomers, start with publicly traded REITs that can be bought and sold through brokerage accounts like Vanguard, Fidelity, and Charles Schwab (NYSE:SCHW). When choosing a REIT, be informed about overall market dynamics, property types, performance history, dividend yields, and the quality of management.

Platforms such as Yahoo Finance or the National Association of Real Estate Investment Trusts (NAREIT) are invaluable for gaining insights into various REITs helping investors make informed decisions.

Precious Metals

Precious metals, particularly gold and silver, have long held a unique position in the investment world, especially as unconventional assets. Their appeal has grown in recent years, as they're often seen as a safe haven during economic upheavals, such as the COVID-19 pandemic.

When traditional financial markets are unstable, investors frequently turn to these metals, valuing them for their tangible nature and historical resilience against inflation and currency devaluation. In fact, between March and August 2020, the price for an ounce of gold shot up 70[1] %.

During times of economic uncertainty, precious metals like gold and silver tend to retain or increase in value. This phenomenon is partly due to their limited supply and enduring demand, as well as their status as an alternative to fiat currency, which can be subject to inflation and devaluation.

There are several ways to include precious metals in your investment portfolio:

  • Physical Metals: Investing in gold, silver, platinum, and palladium bars and coins is a direct way to own precious metals. Reputable dealers like JM Bullion or the U.S. Mint offer various options for purchasing. It's important to consider secure storage, such as safe deposit boxes at banks or personal safes, and insurance for your physical assets.
  • Precious Metal Gold IRAs: These provide a means to include not only gold but also silver, platinum, and palladium in your retirement savings. Companies like Goldco and Augusta Precious Metals specialize in setting up precious metal gold IRAs, offering both expertise and a range of investment-grade metals.
  • Metal ETFs and Mutual Funds: For those preferring not to hold physical metals, ETFs like SPDR Gold Shares (NYSE:GLD) or iShares Silver Trust (NYSE:SLV) track the price of the metal. Mutual funds investing in precious metals, available through investment platforms like Vanguard or Fidelity, offer diversification within the metals market.
  • Mining Company Stocks: Investing in mining companies allows for potential growth linked to metal prices. Researching companies through financial news sites like MarketWatch or using analysis tools on platforms like Investing.com can help identify promising stocks. However, remember these stocks may be influenced by company-specific factors and broader market trends.

Additionally, platforms like Kitco provide real-time data on metal prices, news, and market analysis, while the World Gold Council offers extensive resources on market trends and investment strategies for precious metals.

Collectibles and Art

Unlike traditional assets like stocks or bonds, investing in art and collectibles involves acquiring tangible items with intrinsic cultural, historical, or artistic value. This unconventional asset class has gained attention for its potential to appreciate value while offering an opportunity to merge personal interests with financial goals.

The world of collectibles and art is vast, ranging from classic pieces like paintings and sculptures to modern collectibles such as vintage comic books, rare stamps, limited edition sneakers, and even digital art in the form of non-fungible tokens (NFTs).

Recently, the art market has seen a shift with the advent of online auctions and digital platforms. Websites like Artsy and Saatchi Art have made art more accessible, allowing investors to explore and purchase art from around the globe.

The rise of NFTs has also introduced a digital dimension to art collecting, with platforms like OpenSea and Rarible leading the charge in this new market.

The value of collectibles often lies in their rarity, condition, historical significance, and demand among collectors. For instance, rare coins, vintage watches, and classic cars have communities of enthusiasts and collectors, which can drive up their value over time.

Auction houses like Sotheby's and Christie’s and specialized websites like Heritage Auctions provide venues for purchasing such items.

Authenticity, provenance, and condition are key factors in valuing art and collectibles. Consulting experts, using authentication services, and researching through databases like Artprice or the Certified Collectibles Group can provide insights.

Typically, art and collectibles are considered long-term investments. Appreciation can take time, and the market can fluctuate. Patience and a passion for the items you invest in can make this journey rewarding.

Innovative Investment Strategies

Beyond exploring unconventional assets, modern investors also have access to a range of innovative investment strategies that can further strengthen and diversify their portfolios.

These strategies, often leveraging new technologies and financial products, offer fresh perspectives and approaches to asset management.

The following are some of the top unconventional investment strategies that can help build a robust portfolio:

Dollar-Cost Averaging (DCA)

Dollar-Cost-Averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. By investing consistently over time, you avoid the pitfalls of trying to time the market – a challenging feat even for seasoned investors.

For example, if you decide to invest $100 monthly into crypto, you will purchase more shares when prices are low and fewer when prices are high. Over time, this can result in a lower average cost per share, potentially reducing the impact of market fluctuations on your investment.

This strategy is well-suited for turbulent markets, like those experienced during the COVID-19 pandemic, where frequent swings in asset prices made it difficult to determine the best time to invest. It offers a methodical approach, easing the stress of making large, lump-sum investments at possibly inopportune times.

Tools like investment calculators, available on financial websites such as Investopedia or Morningstar, can help you visualize the potential outcomes of a DCA strategy with various investment amounts and time frames.

Many investment platforms and robo-advisors also offer automated DCA options, allowing you to set up regular investments without having to manually execute each transaction.

Peer-to-Peer (P2P) Lending

Peer-to-peer lending allows individuals to loan money directly to other individuals or businesses through online platforms, bypassing traditional financial institutions like banks. P2P lending offers the potential for higher returns compared to traditional savings or fixed-income investments, aligning with the current trend of digital finance and fintech innovation.

At its core, P2P lending works by connecting investors with borrowers through platforms like Lending Club, Prosper, and Funding Circle. As an investor, you fund a portion of a loan and, in return, receive monthly repayments with interest.

This setup diversifies your investment across multiple loans, spreading the risk. For example, instead of lending a large sum to a single borrower, you can distribute your investment across several loans with varying interest rates and maturity terms.

To mitigate risks, most platforms grade borrowers based on creditworthiness, allowing investors to make informed decisions based on their risk tolerance. Tools like automated investment options and secondary markets for selling loans can also help manage and liquidate your investments if needed.

Robo-Advisors

Robo-advisors are automated platforms that use algorithms to manage investment portfolios, making them an excellent option for both novice and experienced investors who seek a hands-off approach to managing their finances.

Robo-advisors use algorithms to analyze your financial goals, risk tolerance, and investment timeline and then automatically allocate your assets across a diversified portfolio.

Platforms like Betterment, Wealthfront, and Vanguard's Digital Advisor offer easy entry points into the world of investing, with lower fees and minimum balances compared to traditional investment advisors. They provide an efficient way to build and maintain a diversified portfolio, regularly rebalancing to align with market changes and your evolving financial goals.

In the current financial climate, marked by rapid technological advancements and shifting market trends, robo-advisors cater to a growing desire for investment strategies that are both data-driven and user-friendly. Their algorithms are designed to adapt to market fluctuations, making them particularly relevant in volatile or uncertain market conditions.

Thematic Investing

Thematic investing is like putting a spotlight on the future, focusing your investments on big ideas and trends that are shaping the world. Instead of just picking stocks or sectors based on their current performance, this strategy dives into areas that are expected to grow and transform industries over time.

A core aspect of thematic investing is its focus on long-term trends rather than short-term market fluctuations. For instance, current themes gaining traction include sustainable energy, technological advancements like artificial intelligence and 5G, and evolving consumer habits driven by digital transformation.

Investing in these themes means identifying companies and funds that are expected to benefit from these long-term, global shifts.

Tools and platforms that facilitate thematic investing include ETFs and mutual funds focused on specific themes. For example, the ARK Innovation ETF allows investors to tap into innovative tech companies. Additionally, investment platforms like M1 Finance and Motif Investing offer the ability to create custom portfolios centered around specific themes.

Sustainable Investing

Sustainable investing is an approach that combines investors' desire to generate financial returns with their interest in creating a positive social or environmental impact.

This strategy, often synonymous with socially responsible investing (SRI) or environmental, social, and governance (ESG) investing, has gained significant traction in the current market, driven by a growing awareness of global issues like climate change, social inequality, and corporate governance.

At its core, sustainable investing involves selecting investments based on their ethical and sustainability criteria, along with their financial prospects.

This could mean investing in companies that actively reduce their environmental footprint, engage in social responsibility, or exhibit strong governance and ethical business practices. The idea is to support businesses that contribute positively to the world while also seeking financial gains.

For example, the rise of green energy and the shift towards sustainable practices across industries have made ESG-focused funds and companies increasingly popular. Investment tools and platforms have responded to this trend by offering more ESG-focused options.

For instance, mutual funds and ETFs like the iShares ESG Aware MSCI USA ETF provide exposure to companies with high ESG ratings, while platforms like Betterment offer socially responsible portfolio options.

Investors looking to engage in sustainable investing can start by:

  • Researching Sustainable Options: Look for funds and companies that are rated highly for their ESG practices. Resources like Morningstar's Sustainability Ratings and MSCI ESG Ratings can provide valuable insights.
  • Diversifying Within Sustainable Investments: Like any investment strategy, diversification is key. Ensure your sustainable investments cover different sectors and geographies to spread risk and capture a broad range of opportunities.
  • Staying Informed: Keep up with trends and developments in sustainability. Platforms like Sustainalytics and the Sustainable Investments Institute offer in-depth research and analysis in this field.

Final Thoughts

In a financial world that's rapidly evolving, staying ahead means embracing both unconventional assets and innovative investment strategies. A blend of traditional wisdom and modern insight can lead to a robust and resilient investment portfolio tailored not just for today's market but for the future landscape of investing.

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