With recent headlines warning of a potential surge in market volatility, more and more investors are looking beyond traditional asset classes and exploring alternative investing paths. Alternative investing, which includes hedge funds as well as private assets like real estate and side businesses, can provide diversification, reduce risk and generate additional income.
Alternative investing has long been considered the domain of the wealthiest and most sophisticated investors, but don’t let that intimidate you. Like many areas of finance, a new generation of technologies and investment classes are making alternative investing more approachable and transparent.
That said, alternative investing still requires checking a few financial boxes before getting started to ensure you’re building from a solid foundation. For example, before diving into alternative assets, investors should consider eliminating any high-interest debt, creating an emergency fund of three to six months of expenses and having at least $100,000 in savings set aside for long-term investments.
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Once you’ve established a solid financial foundation, it’s time to start exploring alternative investing options. Here are the three main paths to consider when beginning your alternative investing journey.
The DIY approach.
Many people get their start in alternative investing by buying a fixer-upper investment property or starting a side business, as these are some of the most common alternative investments.
This option requires a significant amount of time and effort, but it can also be one of the most lucrative since you don’t have to pay anyone to produce the returns. You’ll want to make sure you’re equipped with the right resources to help guide you along the way. Some I’ve found to be useful include:
- Blogs (for example, BiggerPockets (opens in new tab), Financial Samurai (opens in new tab)).
- Books (The 4-Hour Workweek (opens in new tab), Pioneering Portfolio Management (opens in new tab)).
- Local meetups (for example, EO (opens in new tab), YPO (opens in new tab)).
Self-directed investing.
This path involves relying on your network to source deals or exploring the many alternative investment marketplaces that have cropped up over the past decade, like EquityMultiple (opens in new tab) for real estate or AngelList (opens in new tab) for venture deals, for example.
Self-directed investing requires a lot of research and due diligence, but it can be rewarding if done correctly.
This option is best for someone who is well-networked or has the time and knowledge to perform proper due diligence.
If pursuing this path, it’s critically important you choose deals you believe to be in the top 10% of their category, ideally.
MFOs or tech-asset management hybrids.
If you’re passionate about pursuing alternative investments, but don’t have the time or expertise required with options one and two, outsourcing to trusted experts might be an ideal path for you.
There are two primary options, multifamily offices, like IWP (opens in new tab), that offer a range of planning and investment diligence services for a flat fee, or tech-enabled asset management firms like Equi (opens in new tab) (our platform) that rely on sophisticated data and a specialized diligence team to offer portfolios of what we believe to be the top alternative investment products. This is the most “hands-off” and streamlined approach.
Remember, alternative investing can be a rewarding experience, but it's important to do your research and understand the risks before diving in. It's also important to have a solid financial foundation before investing in alternatives. By following these principles, you'll be well on your way to a successful alternative investing journey.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab).
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