Alternatives to Investing in the Stock Market

The stock market has proven to be an incredible way to build wealth. But it's not the only way to invest, and, for some people, alternative investments might be a smart addition to their portfolio.

An alternative investment is any investment that doesn't trade in the stock or bond markets. Let's take a closer look at the different kinds of alternative assets and the pros and cons of investing in each.

Best alternative investments

These are some of the most popular types of alternative investments you can consider:

• Real estate
• Crowdfunding
• Peer-to-peer lending
• Commodities
• Hedge fund investing
• Cryptocurrency
• Art

Let's delve into each.

1. Real estate

Real estate is an alternative investment when the property is not your home but an income generator. Investing in real estate can generate reliable cash flow, though buying property is not cheap.

Owning rental property

Buying residential or commercial property to rent can be profitable. Reliable tenants generate consistent income, and your expenses are generally limited to maintenance and repairs.

If you want to own real estate but not manage it, you can hire a property management company. You'd give up a large portion of the rental income to the management company and still have to pay for repairs. However, you wouldn't need to oversee any day-to-day operations, collect rent, or otherwise manage your real estate assets.

Real estate development and resale

Colloquially known as "flipping," buying and improving properties and then reselling them can be more profitable than simply collecting rent. Flipped real estate is often purchased at a significant discount, usually because it needs substantial improvements or repairs.

Real estate flipping is also one of the riskier ways to invest in real estate since your ability to generate a profit requires specialized skills and experience. Real estate flippers can confidently value a property, accurately estimate the costs to improve it, and then quickly complete those improvements to make the home available for sale again.

However, buying, improving, and reselling property is time-consuming, requires significant capital, and can be stress-inducing.

2. Crowdfunding

Crowdfunding, a strategy some organizations use to receive funding for a project or venture, is the act of raising generally small amounts of money from many investors. Most crowdfunding is conducted online via digital platforms.

Equity crowdfunding

Equity crowdfunding is the funding of start-up companies. Crowdfunding platforms such as GoFundMe, Kickstarter, and Patreon make it easy to find growing companies to invest in and to vet the businesses to verify their legitimacy. While most companies on crowdfunding platforms are seeking equity, you can also commit capital in the form of debt.

Participating in crowdfunding requires time and effort, as it's important to research and thoroughly understand the companies you are investing in. You'll also need to understand the fees associated with the crowdfunding platform you're using.

Real estate crowdfunding

You can also participate in crowdfunding for real estate assets. Platforms such as CrowdStreet and Fundrise offer investors a wide range of real estate investment options. Just as with equity crowdfunding, you will need to put in the effort to fully understand the real estate assets before committing any capital.

7. Art

You can buy art as an investment and enjoy owning something visually appealing. But an artwork's value is not guaranteed to increase, and you are obligated to securely store and maintain the art itself.

Choosing art that retains and grows in value is a specialized skill set that not many possess. Should you buy the works of established, well-known artists or those of up-and-coming artists? To help you with this decision and others like it, you can hire an expert in the art appraisal field who's reputable and trustworthy.

The art market is illiquid, or not easily converted into cash, and it's difficult to predict when a piece of art will gain value. You may need to own the art for longer than you intended and keep it in an environment with the right temperature, humidity, and light exposure, since deteriorated quality can easily destroy its value.

If you want to combine art ownership with crowdfunding and avoid physically owning any art, you can use an art-focused crowdfunding platform like Masterworks. Investors on Masterworks pool their funds to acquire art and pay a fee to hold and maintain the art until it can be sold for profit.

Are alternative investments right for you?

Many types of alternative investments are accessible only to investors with high incomes or high net worths. Regulatory requirements may require you to be an accredited investor, meaning that either your net worth -- excluding your home -- is greater than $1 million or your earned income exceeds $200,000 per year.

Investing in alternative assets often requires a great deal of capital, and these investments can be illiquid, making them difficult to buy or sell. Many online marketplaces for alternative investments have multiyear minimum holding requirements for the assets.

Owning alternative assets is best suited for investors with diversified portfolios. If you are happy with your allocations to traditional securities such as stocks, bonds, and exchange-traded funds (ETFs), then allocating money to alternative assets may be a good fit.

As for which alternative investment types to choose, consider your appetite for risk, your investing time horizon, and how much time you have to devote to investing. Then you can identify the specific alternative investments that appeal to you most.

Advantages and disadvantages of alternative investments

Alternative investments encompass a wide range of options, some of which are much safer than others. Real estate investments can both provide long-term income and accumulate equity, but the same advantage isn't possible with something like cryptocurrency, which may or may not gain value over time but might not generate any other income.

The disadvantages of such a wide range of investments are also pretty much the same story -- they vary widely. Many are very hard to divest. Art or fractional real estate ownership requires a willing and able buyer to take the asset off your hands, so they're somewhat illiquid. However, crypto, for example, can often be liquidated instantly.