Diversification is an important element when it comes to constructing an investment portfolio. While most investors begin their career with stocks and bonds, there’s a wide variety of alternative investments that can act as great diversification tools to a traditional portfolio. Real estate and gold have long been viewed as viable alternative investments, but crypto is now on the rise as well. Here’s a look at the pros and cons of these three asset classes and the characteristics of each so you can discuss with your financial advisor if they’re a good fit for you.
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The housing market has been on fire over the past year or so, and many investors are paying more attention to real estate as an investment. The value of real estate doesn’t correlate with the stock market, so it’s a great way to diversify one’s holdings. There are also many options when it comes to real estate investing, from personal home ownership to rental properties and commercial buildings.
Generally, real estate grows a bit more than the inflation rate. There are also many ancillary benefits to investing in real estate, from potential tax write-offs to steady cash flow. Of course, picking the right real estate investment is like choosing a stock — not all are the same, and for real estate, location really can be everything. Liquidity can also be a problem with real estate, as transactions can take days, weeks or even months. Another potential drawback for some investors is that real estate can require a large investment, often in the hundreds of thousands of dollars. One way around this is to buy a real estate investment trust, which can be purchased like a stock for just a few dollars per share.
Gold has long been touted as a “real asset,” one that investors flock to in times of economic upheaval or uncertainty. Gold is also used as an inflation hedge, as it is seen as a store of value when other assets become worth less due to the effects of inflation. Gold also doesn’t correlate very well with the stock market, making it a good diversification tool.
One of the drawbacks of investing in actual gold bullion is that it is bulky and heavy and must be stored somewhere. It’s also not particularly liquid, as dealers charge a markup to buy the metal and will never pay the actual market price if you’re selling. Gold also doesn’t pay any dividends or generate any cash flow, unlike stocks or (potentially) real estate. If you simply want access to the gold market without owning the actual bullion, you can buy an exchange-traded fund that tracks the gold market.
Cryptocurrency is a relatively new entrant into the investment world, with the first cryptocurrency, Bitcoin, created only in 2009. However, crypto has been all the rage in 2020 and 2021, with numerous coins posting gains of 1,000% or more. The debate over the long-term viability of crypto is heated, with one side believing it is essentially worthless while the other believes that it will eventually replace fiat currencies like the U.S. dollar. This massive uncertainty as to the true value of the asset class has made crypto notoriously volatile.
Bitcoin, probably the most well-known cryptocurrency, has had a 52-week range from $8,608 per coin to $64,788. It currently sits at about $33,000, or nearly 50% below its April 2021 all-time high. This type of volatility can test even the most risk-tolerant investor, making crypto more of a speculative play at this point than a true diversification tool. However, there’s no doubt that crypto continues to gain visibility and acceptance, and for those that understand its risks, a small portfolio allocation may still be appropriate.
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Last updated: June 28, 2021