The 3 Best Alternative Assets by Returns
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Alternative assets offer tremendous opportunities for patient investors. These investments aren’t correlated with stock market returns and can continue to rally higher even if stocks experience a pullback, correction or enter a bear market.
However, you also don’t want to get stuck with the wrong alternative assets, since most of them aren’t as liquid as stocks. Whereas you can trade your favorite stocks in seconds, it can take much longer — in some instances, several months — to buy or sell an alternative asset, such as real estate, collectibles or private debt.
So if you are wondering which alternative assets are worth considering, the following discusses the three top choices that have delighted investors so far.
Bitcoin
It’s hard to think of any alternative asset or stock that has outperformed bitcoin over the past five years. While investors can choose from many cryptocurrencies, bitcoin is the most reliable and the foremost example of digital assets.
The world’s largest cryptocurrency has soared by 1,200% over the past five years and last week, it broke past $100,000 for the first time this year.
Bitcoin’s returns can receive a further boost from the crypto-friendly incoming Trump administration. The president-elect’s proposal to set up a strategic bitcoin reserve can prompt other countries to follow suit, and with numerous governments buying bitcoin, it will increase demand for the asset, fundamentally propelling the price further.
Even though bitcoin has become a household name at this point, there’s still plenty of potential for the leader of crypto, as adoption rates are still growing. The digital currency has rallied by 121% year-to-date, including a 40% surge in the month following the election.
Bitcoin has now surpassed silver as the eighth largest asset in the world, and at the time of writing, it boasts a market cap of $1.893 trillion — or more than 53% of the total market cap of all cryptocurrencies.
Real Estate
Real estate is another popular alternative asset that can generate lofty returns. Returns vary greatly based on the location, property type and several other factors. While capital and the amount of time required can deter some investors, there are numerous ways to invest in real estate that can lower those barriers to entry. Examples include real estate investment trusts (REITs), real estate investment groups and crowdfunded real estate.
There are also exchange-traded funds (ETFs) that make this alternative asset more accessible. The Vanguard Real Estate ETF (VNQ), for example, has delivered an annualized 9.48% return over the past 15 years. However, this annualized return doesn’t offer the best perspective of how much you can earn with real estate.
As an asset class, real estate’s greatest strength is the ability to leverage with mortgages. As long as investors keep up with predictable monthly payments, they can continue to acquire real estate. It’s more predictable and less risky than using margin to trade stocks, and it increases your potential returns.
For instance, you can buy a $1 million property with only $30,000 if you qualify for a 3% down payment. If you want to avoid private mortgage insurance, you have to put down $200,000 for a 20% down payment.
The down payment and mortgages represent your current investment, not the mortgage’s remaining balance. If you put $30,000 into a $1 million property and net $10,000 in rental income in one year, you have realized a 33% cash-on-cash return. Meanwhile, if you compare the rental income to the property’s $1 million valuation, it only shows up as a 1% return.
That’s just an example, and your returns may look different depending on several factors. However, investors can get a deeper appreciation for real estate’s total returns if they focus on cash-on-cash returns and leverage the tax benefits that come with owning property.
Gold
Gold has withstood the test of time. It’s been a medium of exchange for thousands of years, and it’s more liquid than real estate. Furthermore, gold is easier to carry and transport, but what about its annualized returns?
The SPDR Gold Trust ETF (GLD) has delivered an annualized return of 7.8% over the past decade, but gains have been heating up as gold prices continue to rise. Gold, as a physical asset, has an annualized 11.9% return over the past five years and a three-year annualized return of 13.4%. It’s also gained roughly 30% over the past year.
Gold benefits from trends that would hurt other investments, such as inflation and geopolitical unrest. Economic and global uncertainties can reduce the supply of gold as more individuals and governments accumulate the precious metal.
Gold prices can also remain steady or gain ground during economic cycles that result in hardships for equity securities like stocks. For instance, during 2022’s bear market, gold remained relatively flat as the Nasdaq Composite fell by 33%.
Diversify Your Portfolio with Alternative Assets
Each of these three alternative assets can help increase your net worth and provide more diversification to your investment portfolio. Of the three, bitcoin has been the top performer; however, it comes with significant risk and elevated volatility, making it a better option for younger investors who have longer time horizons to recover from dramatic dips in price.
Real estate is a timeless investment that is always in demand. However, investors will have to analyze additional metrics, such as an area’s population growth, new amenities, rent growth rates, maintenance and appreciation — as well as depreciation — over time. There’s more to do when investing in real estate, and it can take several months to complete a transaction.
Gold is the least risky of the three options. As a store of value, the precious won’t crash like crypto did in 2018 and 2022, and it’s more liquid than real estate. Gold gains value as inflation increases and interest rates go down. It also benefits from economic and geopolitical uncertainty, a characteristic that separates it from most asset classes.
Stocks can still deliver enticing returns, and historically, they provide the strongest gains over the long term. But for investors, diversification is a safeguard against overconcentration. Spreading your capital across traditional and alternative assets can reduce your risk and lead to more opportunities.