When beginning your investment journey, it is easy to get overwhelmed with the sheer number of alternative assets to choose from. Many who are especially risk-averse might shy away from alternative investments entirely; instead, they may just place the majority of their investment portfolio into mutual funds and call it a day.
In essence, everything other than investments you find on Wall Street could be considered to be “alternative.” It’s quite frankly a tactic to manipulate public perception and present Wall Street investments as the safe and profitable default.
But what savvy investors have discovered is that alternative investments aren’t just dodgy crypto schemes and high priced art. Ultra high earning families typically keep anywhere from 45-59% of their investment portfolio in alternative investments. The reason is because it’s a great way to diversify their portfolios for both stability and profit. Alternative investments are often underutilized, yet they have such a profound impact on your finances in the long term.
Most people blindly follow the traditional path—stocks, bonds, mutual funds—because that’s what they were taught. But, when you start exploring alternative investments, that’s when the game changes. You don’t just build wealth—you build freedom.
With that in mind, here are some savvy and unconventional ways investors are diversifying with alternative assets to achieve long-term financial success.
Managing Volatility
As mentioned before, there are extremely high risk alternative investments out there. However, a lot of alternative investments can provide a great deal of stability. Real estate investments and commodities tend to be relatively unaffected or positively impacted by inflation. So if you are heavily invested in stocks that fluctuate with inflation, alternative investments can hedge against volatility of your net worth.
Speaking of hedging, hedge funds are a great way to help protect assets such as retirement. It’s worth noting that hedge funds require a larger initial investment. And even though hedge funds typically have more overall risk, they are still more reliable in the long term for retirement purposes. This is because they provide cushion when the economy experiences a downturn.
Also, maintaining adequate savings is a way to protect against volatility. It allows you to ride through periods of downturn without selling assets at a loss. Just make sure to put your savings in an interest bearing account such as a money market account.
Standard Growth is Deceptively Inadequate
The value of money is a funny thing. It’s pretty common knowledge that a dollar in your pocket will eventually lose value due to inflation. However, building wealth through your investments can’t happen unless they either provide income or appreciate at a rate greater than inflation.
Many people make the mistake of calculating inflation off of the Consumer Pricing Index (CPI), which was recently reporting annual inflation at around 2.8%. But that’s not the true inflation rate for practical purposes. Remember, the CPI doesn’t include energy or food, two of the most consumed products that we have; interestingly enough, they’re also two of the highest inflated products that exist.
And so, those aren’t in the CPI calculation bundle. And additionally, anything else that doesn’t typically benefit the calculation gets removed from the bundle.
But the past five years have been especially rough for inflation. AI tools have recently come out to more accurately calculate inflation and have come up with surprising results. Truflation calculated the compounded inflation rate since January 2020 at 26.08%.
The average annualized return rate of the S&P market from 1928 to 2024 is around 10.06%. Now, it’s true that the comparison between compounded inflation rates and annualized investment rates isn’t apples to apples. However, the argument is still valid that inflation makes a big impact on how much wealth you’re actually accumulating rather than just keeping up with inflation.
Alternative Investments For Diversity and Prosperity
Unless you round out your portfolio, there’s a possibility that your investments will barely keep up with inflation. And if your stock investments can be negatively affected by inflation, it’s all the more reason to diversify. Savvy investors have been aware of the benefits and opportunities of alternative investments for years, and it’s something that everyone should at least consider. Alternative investments can serve as a simple reminder that no matter how trusted the traditional investment path may seem, it doesn’t mean it’s the only path to financial freedom.
