Why Alternative Asset Classes are Gaining Traction among Millennial Investors
As the global economy undergoes seismic shifts, young investors are charting a new course for their financial future. We will discuss why alternative asset classes are gaining traction among millennial investors.
Young investors are forging a new course for their financial future as the global economy undergoes tectonic shifts.
With the S&P 500 index down almost 15% this year, many young investors question the prudence of investing in the traditional stock markets.
Instead, many people are looking into “alts,” shorthand for “alternative” assets.
Although new alternative assets appear virtually every day, some more popular ones include conventional financial instruments like cryptocurrency or precious metals and more out-of-the-box possibilities like artwork, wine, and farms.
Millennials, in particular, have lost faith in conventional investment strategies, which has led to a rise in interest in alternative asset classes.
While just 10% of Americans now hold alternative assets, 30% of Gen Z and 25% of millennials have dabbled in the alternative investing area or are familiar with platforms offering such options, according to recent findings from a Lansons survey, highlighting this trend.
In an environment of high inflation, the attractiveness of these alternatives comes in the belief that they will provide greater returns than traditional stocks.
There is more at play than the promise of big profits in the millennial generation’s shift toward alternative investing.
It indicates a broader shift in their approach to money, as they place greater weight on inflation protection and long-term tangible assets.
Young people have changed their views on saving, investing, and amassing wealth, reflected in their growing interest in alternative assets.
Younger investors seek alternatives to stocks and bonds to protect their wealth from market fluctuations and inflation.
However, not all alt investments are made equally. While some may tout low risks and enormous returns, young investors must grasp the underlying processes driving the value in these markets before moving.
What is an Alternative Investment?
A financial asset that does not fall into one of the traditional investment categories is known as an alternative investment. Stocks, bonds, and cash are examples of traditional categories.
Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is frequently categorized as an alternative investment.
Because of their complexity, lack of regulation, and degree of risk, most alternative investment assets are owned by institutional investors or accredited, high-net-worth individuals.
Unlike mutual and exchange-traded funds (ETFs), many alternative investments have high minimum investments and cost structures.
In addition, these investments have fewer opportunities to publish verified performance data and market to prospective investors.
Even though alternative assets have higher beginning minimums and upfront investment fees, transaction costs are often lower than those of traditional assets due to lower levels of turnover.
Most alternative assets are relatively illiquid, especially when compared to traditional counterparts.
Due to a limited number of purchasers, investors will likely find it far more difficult to sell an 80-year-old bottle of wine than 1,000 shares of Apple Inc.
Investors may need help to value alternative investments since the assets and transactions involving them are frequently infrequent.
For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may need help calculating its value because only 11 exist, and only one can be legally held.
Types of Alternative Assets
Arts and collectibles
Venture capital/ private equity
Raw materials such as gold, silver, oil, and agricultural products are examples of commodities.
Due to the underlying characteristics of what they are, investors can invest in these tangible items that have real-world applications and frequently continuous demand.
Gold’s price, for example, is more stable because it is used in various industries and is seen as a store of wealth.
Investing in real estate involves both actual properties and property-based securities. Investing in real estate crowdfunding platforms, investment trusts (REITs), and mutual funds is also an option.
In addition to tangible asset capital appreciation, investors seek operating income to generate continued potentially reliable cash flow.
Arts and Collectibles
If you gather art, sports memorabilia, entertainment memorabilia, or other collectibles, you can use them as investments or pleasure.
These things might be valuable because of their historical value or will become more valuable as related people (like artists, movie stars, or players) become more famous.
As an alternative asset, farmland can be considered a mix of real estate and commodities. In addition to the benefits of owning land, farmers may also get regular cash payments if their crops and businesses do well.
Cryptocurrency is a new type of digital cash seen as an alternative asset, unlike stocks and bonds.
Some might say that cryptocurrency isn’t an excellent way to protect yourself from other risky investments, but the benefits of staking it could give you capital growth or passive income.
When you invest in peer-to-peer lending, you give money to people or businesses through online platforms that pair borrowers with investors. In a lot of ways, peer-to-peer lending is like buying bonds.
The main difference is that it occurs in more private markets and usually involves dealing with riskier clients. There is a chance of getting bigger returns, but only sometimes.
Venture Capital/Private Equity
Contrary to popular belief, venture capital and private equity are just enhanced forms of stock investing.
Investors may explore other channels to put funds into private companies or start-ups rather than exchanging shares of public companies on an open market.
Tax Implications of Alternative Assets Classes
Many alternative investment businesses have distinct tax regulations than stocks and bonds since they represent an altogether different asset class.
Consider how different alternatives may generate different income streams (for example, capital gain on the sale of a rental property in addition to rent revenue).
Alternative investments such as collectibles and art may provide different tax benefits than typical investments such as stocks and bonds.
Furthermore, collectibles such as paintings or coins are officially defined by the IRS as collectibles and net capital gains are taxed at a maximum rate of 28%.
The rules governing cryptocurrency and other digital assets are constantly changing.
When selling the asset for fiat, exchanging the asset for goods or services, or exchanging the asset for another digital asset, digital assets such as virtual currency, cryptocurrencies, stablecoins, and non-fungible tokens may incur taxable transactions.
Furthermore, while changes in the value of the US currency do not result in a taxable event, fluctuations in the value of digital assets frequently result in capital gains or losses.
For example, real estate and some types of energy assets may provide tax-deferred or tax-free investing opportunities.
This could include 1031 exchanges and Opportunity Zone investments, in which investors can utilize the profits from the sale of an alternative asset to invest in a similar or specific asset to avoid taxes.
Consider speaking with a financial expert and a tax advisor as you begin your alternative investment journey to understand best how to safeguard your asset and achieve optimal efficiency in protecting returns.
Why Alternative Asset Classes are Gaining Traction Among Millenial Investors
The shift in Millenial’s investment strategy has given rise to many unique, alternative assets instead of standard stock and bond portfolios.
This group of young, astute investors is delving deeply into innovative investment opportunities, with agriculture, artwork, and collectibles emerging as popular options.
These unconventional assets, with their different risk and return profiles, are altering the financial environment for Millenial as they navigate the global economy’s volatility.
Here’s a closer look at some atypical ‘alts’ on which Millennial investors are betting.
Farmland is a popular alternative investment that is gaining popularity. As urbanization progresses, the limited resource of arable land becomes increasingly appealing as an investment.
Farmland is appealing because it provides a tangible asset that, in addition to its inherent value, may generate income through farming activities.
It, like precious metals, is a limited resource that can provide some protection against inflation.
Artwork and collectibles, such as vintage wines, modern artwork, and even high-end shoes, are other alternative assets that are making their way into the portfolios of young investors.
Although these assets are generally highly illiquid and have a subjective value, they can often enjoy tremendous gain.
According to Art Basel, Millennial art collectors spent more than 30% of their net worth on art in 2022, and their willingness to enter the art world and acquire art should be addressed.
In 2021, under-25s spent $143 billion in the United States alone, with the art market accounting for $3 billion. As a result, firms across all industries recognize this generation’s significance and quickly modify their marketing strategy.
While these alternative investments can provide appealing returns and possible inflation hedges, they also offer their challenges. The most serious of these is the question of liquidity.
Traditional investments, such as stocks and bonds, often have high liquidity, which means they may be bought or sold quickly without causing a significant price shift.
This is especially important during financial need or while modifying one’s investment strategy.
Many alternative investments, on the other hand, are intrinsically illiquid. Farmland, art, and collectibles, for example, can only be readily or quickly sold without incurring a significant loss in value.
Furthermore, these markets are frequently less regulated and transparent, which can increase risks and make it more challenging to precisely determine an investment’s value.
Amid the allure of alternative asset investing, it is critical to exercise care. Diversifying one’s portfolio with different investments should be a calculated and deliberate.
Big-risk investments can result in big profits, but they can also result in significant losses.