Alternative Investments Demystified: Pros, Cons, and How to Get Started

When it comes to investing, most people are familiar with traditional investments such as stocks, bonds, and mutual funds traded on public markets. However, there is another category of investments known as alternative investments or private market investments that are becoming increasingly accessible to a wider range of investors.

Alternative investments defined

Alternative investments are assets that fall outside the realm of traditional investments. These investments are typically found in private markets and include asset classes such as real estate, private equity, hedge funds, commodities, cryptocurrencies, and precious metals. These investments often have unique characteristics and risk profiles that differ from those of traditional investments.

How to buy alternative investments

Investors can access alternative investments through various means, but generally there are two methods:

Inside a taxable account: Investors can purchase alternative investments directly through a taxable brokerage account.

Inside a tax-advantaged retirement account: Investors can also hold alternative investments within their retirement accounts, such as an IRA. A self-directed IRA, as it’s known in the industry, is an account held by certain custodians who custody alternative assets in retirement accounts. Equity Trust is one such custodian.

Many investors find it beneficial to invest in alternative assets with a retirement account because of the tax advantages. With a Traditional IRA, contributions are tax-deferred; with a Roth IRA, contributions are made after-tax, with tax-free withdrawals if you meet certain requirements. In both accounts, you’re not taxed on any capital gains generated from investments inside the account.

Even though alternative assets may be held in retirement accounts, it’s important to note that there is a small list of investments that are prohibited within these accounts, per IRS rules.

Video: What Are Alternative Investments

6 popular types of alternative investments in an IRA

Here are some of the investments that may be held in a retirement account:

• Real estate: Investors can invest in real estate through direct property ownership, real estate investment trusts (REITs), or real estate crowdfunding platforms.
• Promissory notes: These are written promises to pay a specified amount of money to the lender over a set period, often with a fixed interest rate. Investors can use promissory notes to loan money from their retirement accounts.
• Private equity: This involves investing in privately held companies, often through private equity funds or direct investments.
• Crypto: Investors can gain exposure to cryptocurrencies either by purchasing them directly or through exchange-traded funds (ETFs) that hold crypto assets.
• Gold: Investors can hold physical gold or invest in gold-related assets such as gold mining stocks or gold ETFs.
• Silver: Like gold, investors can own physical silver or invest in silver-related assets.