Are you bored with traditional investments like stocks and bonds? Maybe you’re ready to take your portfolio to the next level by incorporating alternative investment strategies!
Alternative investments are simply investment vehicles that exist outside of the traditional securities markets. As we saw in our article on the best alternative investments, there are many options for investors to consider. While there is money to be made in any of these asset classes, having a strategy for entering the alternative investment market will help you stay focused to maximize your returns while mitigating any risk.
So, in this article, we’re going to show you five different alternative investment management strategies to help you build a profitable alternative investment portfolio.
1. Long-Term Appreciation Strategy
The long-term appreciation strategy involves buying assets that are expected to grow substantially in value over time. With this strategy, you will invest in the near future, with plans to hold the assets for ten years or more, giving the asset time to become more and more valuable.
The long-term appreciation strategy is particularly effective for younger investors who have decades until retirement. By investing early, young investors can take advantage of compounding interest to grow their net worth and retire with a valuable portfolio that can sustain an enviable lifestyle in retirement.
Example of a Long-Term Appreciation Strategy
Collections of fine wines, rare whiskey, and high-end art are examples of a long-term appreciation strategy. In many cases, the investor purchases the collectible, intending to hold it for decades. In some cases, investors purchase with the intention of passing the valuables on to their children as a means of building generational wealth.
Benefits of the Long-Term Appreciation Strategy
The primary benefit of the long-term appreciation strategy is that you can invest comparably little upfront and allow time to do the hard work of adding value for you.
Another benefit is passivity. Once you purchase the asset, you simply keep it safe until you’re ready to sell it.
Potential Drawbacks of the Long-Term Appreciation Strategy
Long-term appreciation assets are typically illiquid. This means that they cannot easily be converted into cash (typically because it takes time to find a qualified buyer and complete the sale).
Another possible drawback is that long-term appreciation can be speculative. It is difficult to accurately project returns for this type of investment. Some of the items could perform even better than expected, while others may appreciate less than anticipated.
2. Cash Flow Strategy
With the cash flow strategy, you focus more on the income generated from the asset than the increase in value over time.
This alternative investment strategy can work for any investor, but it is particularly useful for investors who wish to supplement their incomes. Whether you are a retiree, living on a fixed income, or a professional paid on commission, looking to add income streams, the cash flow strategy could be a good fit for you.
Example of a Cash Flow Strategy
Real estate-based securities, like real estate investment trusts (REITs), exchange-traded funds (ETFs), and mutual funds, with high dividends are good options for a cash flow strategy. You would purchase shares in the fund(s) of your choice, then wait for your dividends to arrive. High dividend yields mean that investors receive quarterly disbursements from the profits generated by the fund. By paying out regular dividends, the share price is less likely to appreciate as much as a growth-based security, but if your goal is cash flow rather than appreciation, this is a fair trade-off.
Benefits of the Cash Flow Strategy
The main benefit of the cash flow strategy is the regular income. It is also possible to find cash flow assets that require very little maintenance. In the example above, the real estate-based securities simply need to be chosen and then reviewed every year or two to confirm that you’re happy with their performance.
Potential Drawbacks of the Cash Flow Strategy
Many cash flow assets don’t grow in value over time as fast as assets that are purchased for appreciation. So you may get regular cash infusions, but you might not watch your net worth rise over time. Having said that, if you don’t need the cash, you could reinvest your dividends to grow your portfolio and your net worth.
3. Distressed Asset Strategy
Distressed asset investing is an alternative investment strategy that involves purchasing an underperforming asset, rehabbing the asset, then selling it for a profit.
Unlike the appreciation and cash flow strategies, which are both long-term, the distressed asset strategy can have a short-term or mid-range holding period. The holding period depends on how long it takes to rehab and resell the asset.
Example of a Distressed Asset Strategy
Business venture crowdfunding is one example of distressed asset investing. With this alternative investment, you can join with other investors to purchase shares of struggling (or brand new) private companies. The companies use this venture capital to either correct course or establish operations. Once the company is stable, investors can sell their shares for a profit.
Benefits of the Distressed Asset Strategy
The big benefit of distressed asset investing is the opportunity to quickly add value. This short-term project potential allows you to get in and out of an investment comparatively quickly, freeing up your capital to be reinvested in a new project in just a few months or a few years.
Potential Drawbacks of the Distressed Asset Strategy
The primary downside of distressed asset investing is the risk. When investing in a struggling or unknown asset, it can be difficult to be confident in the future value of the asset. If the recovery efforts fail, you could potentially lose your entire investment.
4. Heavy Diversification Strategy
Diversification is a cornerstone of any well-balanced investment portfolio. By spreading your investment capital across multiple assets and varied asset classes, you mitigate your investment risk; if one investment fails, the other investments can keep your portfolio profitable.
While some level of diversification is always advisable, some alternative investors are taking this concept further with heavy diversification. Rather than keeping moderate amounts of money in 10-20 investments, they might have a stake in hundreds of investments.
Example of a Heavy Diversification Strategy
Private equity hedge funds are one option for heavy diversification. Hedge funds are packages of investments that are hand-selected and actively managed by a hedge fund manager. Owning a share of a hedge fund means that you are automatically invested in dozens, or even hundreds, of individual investments that could range from stocks to foreign currencies.
Interestingly, these hedge funds can go a step further with fund of funds investing.
What is a fund of funds? A fund of funds is when one fund invests in other funds. For example, a hedge fund might invest in other hedge funds, creating exponential diversification as each fund contains multiple investments.
Benefits of the Heavy Diversification Strategy
The main benefit of a heavy diversification strategy is that you are protected from any single asset going bust. If you were to put all your capital into cryptocurrency, for example, you would see severe losses when this volatile market dips. But if you invest in funds that include crypto as a speculative investment, you gain some exposure for the periodic wins without overexposing yourself to the routine losses.
Potential Drawbacks of the Heavy Diversification Strategy
There are a few potential drawbacks of heavy diversification. First, it is possible to become overly diversified to the point where you hold as many losing investments as winning ones, effectively canceling out your gains. Secondly, it can be difficult to keep track of your investments and monitor their performances. And finally, this type of investing can come with heavy management fees from hedge fund and/or mutual fund managers.
5. Balanced Hybrid Strategy
A balanced hybrid strategy seeks to consolidate two or more of the other alternative investment strategies on this list into a comprehensive investment plan that takes advantage of as many benefits as possible while mitigating the risks wherever possible.
A balanced hybrid strategy can be implemented by beginners with little investment capital or applied as a high-net-worth investing strategy for individuals with lots of capital.
Example of a Balanced Hybrid Strategy
Real estate is the ultimate example of a balanced hybrid strategy. Consider a multi-family fixer-upper, for example. You can purchase a distressed property and renovate it to immediately add value. Then you can rent the units out, enjoying the cash flow of rental income while the property appreciates long-term. And, because you have multiple units for rent, you have some built-in diversification from the separate income streams. You would also have the option to diversify further by building a real estate portfolio of additional properties.
Benefits of the Balanced Hybrid Strategy
By combining individual strategies into one balanced hybrid strategy, you get the respective benefit of each of your individual strategies. In our real estate example, you get the benefits of
- Long-term appreciation,
- Short-term gains through value-adds,
- Ongoing cash flows,
- Diversification opportunities, and
- Tax benefits of investing in real estate.
Potential Drawbacks of the Balanced Hybrid Strategy
Depending on your chosen investment vehicles, you could end up investing a lot of time and energy in implementing your balanced hybrid strategy. Rental property management, for example, can be time-consuming and potentially stressful.
Having said that, there are ways to build a balanced hybrid portfolio in real estate without managing the assets yourself. You could, perhaps, hire a property management company to oversee day-to-day operations for your buildings. Or you could leverage real estate syndication to access unique real estate deals and enjoy all the benefits of a balanced hybrid strategy without doing any of the legwork or management yourself. The next section will show you how.
How Real Estate Syndication Makes Alternative Investment Strategies Easy to Implement
Real estate offers more benefits with fewer risks than any other alternative investment listed in this article. Unfortunately, real estate investing can be overwhelming. Between analyzing potential properties, negotiating good deals, overseeing renovations and maintenance, handling renters, and managing the finances, there are many potential pitfalls to avoid in real estate.
But with real estate syndication, all of these details are professionally managed for you, allowing you to potentially become a millionaire through real estate completely passively. Syndication is when multiple investors pool funds to buy into a real estate project, along with a sponsor who will handle the management of the asset. This gives you access to high-value deals that you might not be able to purchase alone. It also provides diversification opportunities by allowing you to invest a comparatively small amount in several different projects rather than putting all your capital into a single project.
You can get positive cash flows, appreciation, tax breaks, diversification, and passivity from this one type of alternative investment! Learn more about how you can benefit from real estate syndication.
Invest in an Alternative Real Estate Strategy with Gatsby Investment
When you’re ready to take advantage of alternative investment strategies, Gatsby Investment will be here to help you get started.
Gatsby is a real estate syndication company with an impressive track record of successful real estate projects. From 2017 through 2022, our investors saw average annualized returns of 24.22%! All you have to do is confirm your status as an accredited investor (which is a Securities and Exchange Commission requirement for many alternative investment vehicles) and choose your investment projects. Our team of well-qualified experts will take care of the rest.
We’re excited to help you build a real estate portfolio that capitalizes on the balanced hybrid alternative investment strategy for maximum profitability potential!