Is Alternative Investing the Key to Achieving Financial Independence? - Money Mastery Millennial (2024)

Are you tired of the same old advice on how to save for retirement and build wealth?

Are you looking for something more exciting than traditional investment options like stocks, bonds, and mutual funds?

Alternative investing may be the key to achieving the financial independence that you’ve been searching for.

According to a recent survey, nearly 70% of millennials are interested in alternative investments, such as real estate crowdfunding, peer-to-peer lending, and cryptocurrencies.

And it’s no wonder why – alternative investments offer the potential for higher returns, diversification, and access to previously exclusive markets.

But with potential rewards come potential risks.

Alternative investments are often less regulated, more illiquid, and more complex than traditional investments, which can lead to higher fees, lower transparency, and higher risk.

That’s why it’s important to understand the pros and cons of alternative investing before diving in.

In this article, we’ll explore the world of alternative investing and its potential to help you achieve financial independence.

We’ll cover the different types of alternative investments, their characteristics, the pros and cons, and whether they are a good fit for you.

We’ll also provide practical tips on how to get started with alternative investing and mitigate the risks involved.

So, if you’re ready to take your investments to the next level and explore the exciting world of alternative investing, keep reading!

1. Understanding Alternative Investing

Alternative investing refers to any investment that falls outside the traditional investments of stocks, bonds, and cash.

These investments are often less regulated, more complex, and have higher risks than traditional investments.

Alternative investments can be physical assets such as real estate, precious metals, or art, or financial assets such as hedge funds or private equity.

1.1 Types of alternative investments

1.1.1 Real estate crowdfunding

Real estate crowdfunding involves pooling money from multiple investors to invest in a real estate project.

It is a form of equity crowdfunding where investors can own a share of the property and receive returns based on the project’s profits.

The minimum investment amount can be as low as $500, making it accessible to a wider range of investors.

Real estate crowdfunding offers the potential for high returns, diversification, and access to the real estate market without the need for large amounts of capital.

1.1.2 Peer-to-peer lending

Peer-to-peer lending (P2P) is a form of lending that connects borrowers with lenders through online platforms.

P2P platforms enable borrowers to access loans at lower rates than traditional banks and offer investors the opportunity to earn higher returns than traditional savings accounts.

The P2P market has grown significantly in recent years, with the global P2P lending market size estimated at $67.9 billion in 2020.

1.1.3 Cryptocurrencies

Cryptocurrencies are digital assets designed to work as a medium of exchange.

The most well-known cryptocurrency is Bitcoin, but there are thousands of other cryptocurrencies available.

Cryptocurrencies offer the potential for high returns, but they also come with high risks due to their volatility and lack of regulation.

According to a survey conducted by Finder.com, 27% of millennials have invested in cryptocurrencies.

1.1.4 Hedge funds

Hedge funds are private investment funds that use advanced investment strategies, such as leveraging, short selling, and derivatives, to generate high returns.

They are generally only available to accredited investors due to their high minimum investment requirements and limited liquidity.

Hedge funds offer the potential for high returns but also come with high fees and the potential for significant losses.

Table: Comparison of Alternative Investments

In conclusion, alternative investments offer millennials the potential for higher returns, diversification, and access to previously exclusive markets.

However, it’s essential to understand the risks and benefits associated with each investment type before investing.

It’s also crucial to diversify your investment portfolio and consult with a financial advisor to determine the suitability of alternative investments for your financial goals and risk tolerance.

1.2 Characteristics of alternative investments

1.2.1 Limited liquidity

Alternative investments are often less liquid than traditional investments, meaning they cannot be easily converted into cash.

For example, real estate investments can take months or even years to sell, and private equity or hedge funds have a lock-up period during which investors cannot withdraw their funds.

This lack of liquidity can be a disadvantage if you need cash quickly or if the investment doesn’t perform as expected.

1.2.2 High-risk and high-return

Alternative investments generally have higher risks than traditional investments, but they also offer the potential for higher returns.

For example, according to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual return for private real estate funds between 1990 and 2019 was 9.85%, compared to 8.66% for the S&P 500 index.

However, it’s important to note that past performance is not a guarantee of future results, and the potential for high returns comes with higher risks.

Diversification opportunities Alternative investments offer the potential for diversification by providing exposure to different asset classes than traditional investments.

For example, real estate investments can provide exposure to the property market, which behaves differently than the stock market.

Diversification can help to reduce overall portfolio risk and enhance returns.

Table: Advantages and Disadvantages of Alternative Investments

2. The Pros of Alternative Investing

2.1 Potential for higher returns

Alternative investments have the potential for higher returns compared to traditional investments such as stocks and bonds.

For example, real estate crowdfunding platforms like Fundrise have reported average annualized returns of 8.7% since inception in 2012, while peer-to-peer lending platforms like LendingClub have reported returns of around 4-6%.

Hedge funds, which are a type of alternative investment, have reported returns in the range of 7-10% over the past decade.

These returns can provide a boost to a millennial’s investment portfolio and help to achieve financial independence sooner.

2.2 Diversification opportunities

Alternative investments offer diversification opportunities by providing exposure to different asset classes and markets.

This can help to reduce overall portfolio risk and enhance returns.

For example, real estate investments can provide exposure to the property market, which behaves differently than the stock market.

Cryptocurrencies, another type of alternative investment, provide exposure to a market that is uncorrelated with traditional markets.

By including alternative investments in a portfolio, millennials can reduce their reliance on traditional investments and potentially achieve better risk-adjusted returns.

2.3 Access to previously exclusive markets

Alternative investments can provide access to previously exclusive markets only available to institutional investors or high-net-worth individuals.

For example, private equity and venture capital investments, which are a type of alternative investment, provide exposure to early-stage companies that may not yet be publicly traded.

These investments can offer higher returns than traditional investments but were previously only available to accredited investors.

Real estate crowdfunding platforms also provide access to real estate investments that were previously only available to institutional investors.

2.4 Potential for passive income

Alternative investments can provide a source of passive income, which can be an attractive feature for millennials looking to achieve financial independence.

For example, real estate crowdfunding investments can provide regular rental income from properties, while peer-to-peer lending can provide regular interest income.

Hedge funds may also provide regular income in the form of dividends or interest payments.

3. The Cons of Alternative Investing

Alternative investing can offer high returns and diversification opportunities, but it also comes with its fair share of risks and downsides.

Let’s look at some of the potential cons of alternative investing.

3.1 Lack of regulation

Unlike traditional investments such as stocks and bonds, alternative investments are often less regulated.

This lack of regulation can lead to fraudulent activities and investment scams.

It’s important to do thorough research and due diligence before investing in any alternative investment to ensure that it’s a legitimate opportunity.

3.2 Limited liquidity

Many alternative investments have limited liquidity, meaning it can be difficult to sell them quickly or find a buyer.

For example, real estate crowdfunding investments may require holding the investment for several years before it can be sold.

This lack of liquidity can make it difficult to access your money when you need it.

3.3 High fees and expenses

Alternative investments often come with high fees and expenses, which can eat into your potential returns.

For example, hedge funds typically charge a management fee of 2% and a performance fee of 20%.

Additionally, real estate crowdfunding platforms may charge fees for managing the investment and finding the deal.

3.4 Lack of transparency and understanding

Alternative investments can be complex and difficult to understand, which can make it hard to evaluate their potential risks and returns.

Additionally, they may not be required to disclose the same level of information as traditional investments.

This lack of transparency can make it challenging for investors to make informed decisions about their investments.

Overall, it’s important to carefully consider the potential downsides of alternative investing before committing your money.

While it can offer attractive returns and diversification opportunities, it’s essential to do your due diligence and understand the risks involved.

4. Is Alternative Investing Right for You?

As a generation facing unique financial challenges, millennials are increasingly turning to alternative investments as a way to build wealth and achieve financial independence.

In this section, we’ll explore whether alternative investing is a good fit for millennials.

4.1 Millennials’ investment habits and Preferences

Millennials have shown a preference for investing in assets beyond traditional stocks and bonds.

According to a survey by Bankrate, 30% of millennials have invested in cryptocurrency, compared to just 2% of baby boomers.

Additionally, many millennials are interested in socially responsible investing, which aligns with their values and beliefs.

4.2 Risk Tolerance and time horizon considerations

Investing in alternative investments requires a certain level of risk tolerance and a longer time horizon.

Millennials may have a higher risk tolerance due to their age and the fact that they have more time to ride out market volatility.

Additionally, investing in alternative investments may require a longer time horizon, as many of these investments have limited liquidity and require a longer holding period.

4.3 Suitability of alternative investments for Millennials

Alternative investments can be a good fit for millennials who are looking to diversify their investment portfolios and generate higher returns.

They may also align with millennials’ values and preferences for socially responsible investing.

However, it’s important to carefully evaluate the risks and downsides of alternative investments before committing your money.

Overall, alternative investing can be a good fit for millennials who are willing to take on higher levels of risk and have a longer time horizon for their investments.

However, it’s important to carefully evaluate each investment opportunity and ensure it aligns with your financial goals and values.

5. How to Get Started with Alternative Investing

Are you ready to dip your toes into the world of alternative investing? Here are some steps to help you get started:

5.1 Determine investment goals and risk tolerance

Before making any investment, it’s important to determine what you hope to achieve with your investment and how much risk you’re willing to take on.

Are you looking for long-term growth or short-term gains?

Are you comfortable with high-risk, high-reward investments or do you prefer a more conservative approach?

These are all questions to consider when evaluating your investment goals and risk tolerance.

5.2 Research and evaluate potential investments

Once you have a better understanding of your investment goals and risk tolerance, it’s time to start researching and evaluating potential alternative investments.

Take the time to thoroughly research each investment opportunity, including the risks and potential returns.

Look at historical performance data and read reviews from other investors to get a sense of the investment’s track record.

5.3 Consider consulting with a financial advisor

Alternative investments can be complex and difficult to understand, so it may be helpful to consult with a financial advisor before making any major investment decisions.

A financial advisor can help you evaluate your investment goals and risk tolerance, guide specific investment opportunities, and help you build a diversified investment portfolio.

5.4 Start small and diversify

As with any investment, it’s important to start small and diversify your portfolio.

Don’t put all your money into one alternative investment – instead, consider spreading your investments across a variety of opportunities to minimize risk.

This also allows you to test the waters and see which investments work best for you.

Bottom Line…

In conclusion, alternative investing can be a valuable tool in achieving financial independence for millennials.

While it may not be suitable for everyone, the potential for higher returns, diversification opportunities, and access to previously exclusive markets are attractive benefits.

However, it’s important to keep in mind the potential drawbacks such as limited liquidity, high fees and expenses, and lack of regulation.

As with any investment, it’s important to do your due diligence, determine your investment goals and risk tolerance, and consider consulting with a financial advisor.

By starting small and diversifying, millennials can take advantage of the benefits of alternative investing while minimizing the risks.

As the investment landscape continues to evolve, it’s worth exploring alternative investments as a viable option for achieving financial independence.