Alternative assets versus traditional assets
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If you’re considering investing your money, but feel overwhelmed by all the options on offer, you’re not alone. Making decisions about where to direct your hard-earned capital can be daunting, especially with so many digital tools available. On top of that, there’s a vast spectrum of financial instruments to choose from, from traditional stocks and bonds to exciting alternative assets such as cryptocurrency or venture capital.
In this blog post, we’ll examine both traditional and alternative assets in-depth, as well as explore how investors can leverage each to curate a portfolio that meets their financial goals. We’ll cover:
- What are traditional assets?
- What are alternative assets?
- How alternative assets compare to traditional assets
- The role of traditional and alternative assets in your portfolio
Let’s dive in.
What are traditional assets?
Traditional assets fall into three primary categories: stocks, bonds, and cash. Let’s take a closer look at each:
- Stocks, also known as equities, are shares of ownership companies sell on the public market to help finance and grow their operations. In order to make a return on investment in stocks, an investor must either buy stock in a company that pays dividends or sell shares of stock for more than they were purchased for.
- Bonds are fixed-income investments. An entity, typically a corporation or the government, borrows money from an individual in the form of a bond. Each bond is assigned a maturity date, at which point the individual will have been repaid in full with interest. The interest rate is dictated by inflation and the risk of the entity defaulting on the loan (typically higher for corporations than for governments).
- Cash is an umbrella category that encompasses not only literal cash on hand, but also cash equivalents and money market instruments. This includes money market funds, guaranteed investment certificates (GIS), Treasury bills (T-bills), and cash in a savings account.
What are alternative assets?
“Alternative asset” describes any asset besides the three traditional investments we just discussed. Alternatives can be found in both the public and private markets, often in inefficient sectors. This includes, but is by no means limited to:
- Real estate: Residential and commercial properties are popular assets among investors from all walks of life.
- Private equity: This mode of investment is typically done through a dedicated fund that takes an ownership stake in private companies with the intention of growing and selling them.
- Private credit/debt: Private debt (or private credit) is financing provided to a startup by an external investor, usually a private investment fund, in the form of a loan.
- Venture capital: This asset class is a subset of private equity that deals almost exclusively with startups and early-stage companies.
- Commodities: This method of investing involves dedicating capital to raw materials that are used to manufacture other products.
- Collectibles: Any item that people consider valuable could make a valuable addition to an investment portfolio – wine, baseball cards, fine art, even vintage cars!
- Cryptocurrency: Decentralized financial instruments built on the blockchain are the newest members of the alts asset class and are quickly gaining popularity.
How alts compare to traditional assets
While both traditional and alternative assets can have a place in a diversified investment portfolio, they each come with a unique set of benefits and risks that need to be carefully balanced.
Let’s dig a little deeper into how these asset classes compare:
Markets
Traditional assets are bought and sold in the public market, which, as the name suggests, is accessible to the general public. Any individual with cash on hand is able to buy and sell stocks or bonds in companies that are publicly traded. Alternative assets, on the other hand, are part of the private sector and generally only accessible to accredited investors. In terms of investment opportunities, alts and the private markets are known for offering potential higher returns but also come with higher risk. The public markets, while more stable, tend to offer lower returns in comparison.
Liquidity & time horizon
Overall, alternatives tend to be less liquid than traditional assets. Assets like venture capital and private equity typically won’t generate returns for a period of years or even decades. On the traditional asset side, only bonds really come close to matching this time horizon. Stocks and cash are both extremely liquid since they change hands easily and frequently. There are fewer buyers and sellers in the alts market, and purchase sizes tend to be larger, creating more friction, which gives the alternative market less liquidity in the short term.
Volatility
The friction mentioned above is part of what makes alts less volatile than some of their traditional counterparts. The value of many alternative assets – art, wine, and real estate location, for instance – fluctuate minimally from day to day. Many alts also have the benefit of being real assets, meaning they are tangible items with material value. Although their prices in the short term can be hard to predict, real assets are generally expected to appreciate over time, making them instrumental in reinforcing a portfolio against inflation or even recession.
The stock market, on the other hand, is famously volatile and can experience huge fluctuations in the span of hours or even minutes. For some, the challenge of keeping up with constantly shifting market forces is part of what makes investing so exciting. However, for those seeking stability, comparatively less volatile traditional assets like bonds and cash equivalents may be more appealing.
Accessibility
Digital platforms have made access to both traditional and alternative assets nearly universal, but some restrictions still apply.
Ways to invest in traditional assets
Traditional assets are extremely accessible and are often used by new investors to start building a portfolio. One of the easiest ways to start investing in this asset class is to open a high-yield savings account, where cash you set aside will accrue interest at a higher rate than a standard account. Certificates of deposit (CDs) offer a similar benefit, but the funds can only be accessed after the certificate matures, unless you’re willing to pay a penalty.
Investors interested in the stock market also have a variety of options. Online brokerage accounts are quick and easy to open and can be an excellent choice for users who want to get hands-on with their trading. For investors who want to take a more passive approach to their stock portfolio, robo-advisors offer complete investment management driven by advanced software and algorithms.
For a more diversified investment strategy, many investors elect to take advantage of traditional asset funds. Exchange-traded funds (ETFs) and mutual funds hold a mixture of stocks, bonds, and other securities, and can provide tax advantages when held in IRA and 401k accounts.
Ways to invest in alternative assets
For decades, alternative assets have been available almost exclusively to institutional and high-net-worth investors with the resources and expertise to attain and manage them. In recent years, however, the alts space has become much more accessible to retail investors. This is thanks in large part to both technological innovations and changes in federal regulations. While the inherent risks mean you still need to be an accredited investor to add alts to your portfolio, the definition has expanded, putting this valuable asset class within reach for more people. As such, there’s been an explosion of innovative firms working to democratize every corner of the alts investing sector, from venture capital (Alumni Ventures) and fine art (Masterworks) to wine (Vinovest) and franchise investing (FranShares – hey, that’s us!).
Regulation
In the United States, the Securities and Exchange Commission (SEC) is the regulatory body that handles just about everything related to investing. Formed after the disastrous stock market crash of 1929, the SEC’s role is to ensure investors are treated fairly and maintain order in the markets. Any investment vehicle that is classified as a security must be registered with and monitored by the SEC. All traditional asset classes fall under this classification, as do many alternatives.
However, the alts market is so diverse that some assets don’t meet the standard definition of a security and this has necessitated the creation of other means of regulation, like the real estate agent licensing system. Other assets, like franchises, are subject to regulation by both the SEC and Federal Trade Commission (FTC). New assets built on emerging technologies, like crypto, have yet to be regulated at all. If you’re planning to invest in alternatives, it’s critical to understand the regulatory oversight, if any, that applies to your asset(s) of choice, and what protections that affords you as an investor.
Complexity
Traditional assets such as stocks and bonds tend to be more familiar to most investors and therefore may seem like a better bet financially. However, investing in alternative assets, such as real estate, private equity, or crypto, can yield much higher returns in the long term. Be aware, though, that these assets typically require a more in-depth understanding of the market and investment strategy. The increase in complexity means that investors must do extensive research and possess some experience with the investment process in order to be successful.
Risks
Investing in any asset class comes with inherent risks and an individual investor’s risk tolerance may vary considerably depending on their financial goals, life stage, and market perspective. The appeal of alternative assets often lies in their potential for greater returns, but risks associated with these investments are often much higher, particularly in the short run. Traditional assets, on the other hand, are relatively less risky but may not offer the same high-reward potential.
The role of traditional and alternative assets in your portfolio
Investing successfully takes time; and with so many assets to choose from, building the ideal portfolio for your goals can seem impossible. Luckily, diversification is one of the core tenets of modern investing. The lower risk and high liquidity of traditional assets make an excellent counterweight for the high return potential and low volatility of alternatives, and vice versa. By limiting your exposure to a single market or type of asset, you can mitigate the impact of adverse market forces and increase your chances of realizing returns.
Passive franchise investing with FranShares
If you’re an alternative investor who’d like to diversify even further by adding franchises to your portfolio, consider passive fractional franchise investing with FranShares. Our approach offers high earning potential and diversification in a completely passive investment model. We give both retail and accredited investors access to all the benefits of franchising with low initial capital outlay and zero fees.
To learn more about FranShares and this unique opportunity, sign up for our platform on our home page.