Investing shouldn’t be something just for those with deep pockets. However, while many investments such as stocks, bonds and ETFs are available to anyone over the age of 18, some investments have traditionally only been available to those with large incomes or a significant net worth.
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In his new book, “The Holy Grail of Investing,” financial influencer and businessman Tony Robbins offers some alternative investments that were once only available to the ultra-wealthy but are now beginning to open up to regular retail investors. Here’s everything you need to know about these investment strategies.
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What Are Alternative Investments?
Alternative investments are financial assets that don’t fit into the traditional categories of stocks, bonds or cash. These include things like real estate, private equity, venture capital, and more. Historically, these types of investments were only accessible to the already-rich and institutional investors due to their high entry costs and differences in financial regulations. However, new platforms and technologies are making it easier for everyday investors to get involved.
Robbins says that alternative investments can be a good way for regular people to diversify their portfolios. Some categories of alternative investments will not go up and down in value with the stock and bond markets. This means they can be a good way to avoid risk and not keep all your eggs in one basket.
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Accredited vs. Retail Investors
While the traditionally high entry costs of alternative investments are one hurdle, there is also another barrier to entry — many alternative investments are regulated differently. In practice, this means that the SEC only allows a certain category of people, called accredited investors, to participate in them.
An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. The rationale is that these investors are sufficiently knowledgeable and financially stable to handle the risks associated with certain investment types. In the United States, to qualify as an accredited investor, an individual must meet specific income or net worth criteria:
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An annual income exceeding $200,000, or $300,000 for joint income, for the last two years with the expectation of earning the same or higher income in the current year.
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A net worth exceeding $1 million, either individually or jointly with their spouse, excluding the value of the primary residence.
Nowadays, some alternative investments, such as the ones Robbins lists in his book, are opening up to people who don’t meet these qualifications. Here are the main four.
1. Real Estate
Real estate investments can go beyond just buying a home. They can range from more commonly known investments like rental properties and commercial real estate to more obscure investments such as real estate investment trusts (REITs), real-estate debt investments or real estate crowdfunding. These investments generate income through rent or interest payments. Real estate investments usually offer a steady cash flow and are considered a good hedge against inflation.
Even though buying an office building might be out of reach for a middle-class investor, there’s still a way for retail investors to get into real estate. Many REITs are publicly listed on exchanges and are therefore available to retail investors. These securities will invest in a portfolio of commercial real estate assets and allow you to take part in the profits.
Generally, REITs are based either on equity or mortgages. Equity REITs own and operate income-generating real estate properties. The bulk of their revenue can come from leasing space, whether in office buildings, retail spaces, apartments or industrial sites, and collecting rent from tenants. As property values and incomes increase, so does the value of the REIT.
On the other hand, mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. Instead of earning income from rent, these REITs earn income from the interest on the financing they provide.
2. Private Equity and Venture Capital
Private equity involves investing directly in private companies, rather than buying stocks of publicly-traded companies. Venture capital is a subset of private equity, focused specifically on investing in early-stage startup companies with high growth potential. Both of these used to be out of reach for most people unless they were accredited investors — typically needing a high net worth or substantial annual income.
One of the primary attractions of private equity is the potential for higher returns compared to public markets. According to Morgan Stanley, while the S&P500 returned an average rate of 10.7% annually between 1990 and 2021, U.S. private equity investments returned an average of 15.4%.
For retail investors, accessing private equity investments is most feasible through private equity funds. These funds pool money from multiple investors to buy stakes in private companies or buy out public companies, taking them private to restructure and hopefully sell them at a profit.
Some funds may also specialize in venture capital, providing funding to startups showing high growth potential. Private equity funds are typically managed by professional management teams that assess which companies to invest in and how to improve their value.
3. Private Credit
Private credit investing involves extending loans to private companies or purchasing debt issued by these companies that is not traded on public markets. This form of investment has grown in popularity among investors seeking alternatives to traditional fixed-income securities like public bonds.
Typically, private credit investments offer higher yields compared to traditional fixed-income products due to their higher risk and illiquidity. Like other debt instruments, private credit can provide investors with a steady income stream through interest payments, which are often higher than those offered by public bonds.
As interest in alternative investments rises, financial institutions have begun creating public funds that invest in private credit and allow retail investors to reap the gains (or losses).
4. Art and Collectibles
Investing in art and collectibles (like coins, stamps or rare wines) can be both fun and financially rewarding. These assets typically don’t correlate with traditional stock or bond markets.
One of the most important things you need to do when investing in collectibles is to make sure you really know the category you’re investing in. Collectible prices can rise based on various factors, including rarity, demand, historical significance and condition. Having deep knowledge about the specific collectible category you’re interested in can mean the difference between securing a profitable investment and wasting your money.
Until recently, investing in high-end art or collectibles was predominantly for the ultra-wealthy. However, with the rise of online platforms, fractional ownership of expensive art or collectibles is becoming possible for more people.
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