Last week, I talked about some of the most common investments instruments (stocks, bonds, ETFs, mutual funds, and TDFs). You can find that article here: ETFs vs Mutual Funds vs Index Funds: Investing 101. Today, I want to talk about the asset classes outside of cash, equity/stock, and fixed/income/debt/bonds: real estate, commodities, and alternatives.
Why other asset classes?
“An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace.” Because of that, we want to invest in multiple asset classes for diversification.
If we invest 100% in one asset class, say stocks, and stocks go up, that’s great. Alternatively, if stocks go down, that’s less than ideal. When we have a portfolio that is diversified between different asset classes, as one asset class goes down others may remain neutral or go up. This is the chief reason folks invest in bonds even though their historical return is lower. When stocks go down, bonds don’t go down as much or even go up. In a future article, I will talk about this and glide paths more in-depth.
tl;dr: asset classes behave differently from one another; we want to own a diversified portfolio, so when one asset class goes down it doesn’t sink our whole portfolio.
[Skip to Pokemon, Art, & Wine]
[Skip to Crypto, SPACs, & NFTs]
[Skip to Venture Capital, Private Equity, & Pre-IPO]
Investing in real estate
Outside of stocks and bonds, real estate is easily the most popular asset class and investment most folks own. There are several ways you can own real estate, so I want to speak about them separately.
Part I, Physical Real Estate
The first way to own real estate is to…own real estate. This can be in the form of your primary residence, a vacation property(s), or rental property(s). The main thing to grasp here is that you own physical real estate.
Part II, REITS
A second way people have exposure to real estate is through REITs (real estate investment trusts). “A REIT is essentially a corporation that owns and manages a portfolio of income-producing real estate properties such as apartments, hotels, malls and office buildings.” You can purchase these through your brokerage just like a stock or ETF. Some advantages of investing in REITs are 1) getting some diversification from stocks/bonds; 2) high dividend yields (that is the % of a stock/REIT’s price a company pays the shareholder each year). Disadvantages include the fact that REITs actually trade very, very similar to stocks. That is, when the stock market is down REITs probably are, too.
Above you can see REITs traded very similar to the stock market (both down).
Part III, Real Estate Crowdfunding
Lastly, you can invest in real estate via a real estate crowdfunding platforms like Fundrise or Crowdstreet. The big difference between investing in a REIT vs something like Fundrise is with a REIT you are investing in a corporation (they then invest your money in real estate) whereas with Fundrise you are directly investing in real estate. The two best advantages of crowdfunding are: 1) more control on the type of real estate investments you can make; 2) much more diversification from stocks (i.e.: even when the stock market had down years, these platform had positive returns).
Above you can see Fundrise has almost no correlation with the stock market, and in 2018 and 2020 it was up despite the stock market being down. On the other hand, we see a lot more correlation between the stock market and Vanguard’s Real Estate ETF (e.g.: 2018).
To learn more about investing in real estate check out this article by Financial Samurai: https://www.financialsamurai.com/why-invest-in-real-estate-crowdfunding-over-reits/
tl;dr: real estate gives you another way to invest your money; there are 3 ways to invest in real state: buy a house, invest in a REIT, and/or invest in a crowdfunding platform; IMO your goal with real estate should be finding a way to make money when other asset classes (like stocks) are down
Disclaimer: I am not invested in Fundrise but plan on investing 5-10% of my portfolio in it (or something similar) soon (pending procrastination)
Commodities
After stocks, bonds, and real estate, the remaining major investment/asset class is commodities. The major commodity most investors invest in is gold. Like real estate, you can invest in commodities/gold in a couple of ways; the major two are 1) buy physical gold; 2) invest in a gold ETF (or company that mines gold/commodities). While gold is the most popular commodity, $GLD is one of the most popular ETFs folks invest in for gold exposure. Other popular commodities include silver, crude oil, and natural gas.
One of the world’s most famous investors and hedge fund managers, Ray Dalio, is a huge proponent of investing in commodities. 15% of his famed, “All Weather Portfolio” is invested in commodities (half of which is invested in gold, half in broadly diversified commodities). In my next post, we will cover a few famous portfolios and build one of our own.
tl;dr: commodities are another asset class to invest in; gold is the most popular commodity investors invest in; when there is panic/falling stocks/increasing inflation gold prices tend to go up
Disclaimer: I am not invested in any commodities but am tracking $GLD and would buy if the price continues to come down
Above you can see the best and worst performing asset classes change over time. If you were 100% invested in REITs in 2006, you’d be very happy. If you held that position through 2007, not so much. The above highlights the rotation of top and bottom performing asset classes and why diversification is so necessary.
Alternatives
Alternatives are less traditional asset classes and many folks actually group real estate and commodities within the alternative umbrella.
The main alternatives I want to talk about briefly are trading cards/collectibles, art, and wine. Trading cards are making a massive comeback both for sports and Pokemon cards. For investing in art, there are companies like Masterworks while for wine companies like Vinovest exist. The big takeaway with alternatives is that they’re a bit more speculative but their value shouldn’t be dictated with how the stock or real estate market are going.
tl;dr: these are additional ways to invest your money that should trade independently from the major, previously mentioned asset classes.
Disclaimer: I own some Pokemon cards somewhere and have explored investing in Masterworks (too lazy to take a call with a sales rep)
What the kids are talking about
Cryptocurrency
Don’t want to spend a ton of time here as I’m sure everyone has heard of at least Bitcoin and Ethereum (and maybe Doge). I have friends that swear by crypto, but it’s not for me (yes, I know I have and am probably continuing to miss out on my money going to the moon). My only issue is that crypto, or at least Bitcoin and Ethereum seem to trade pretty lockstep with stocks. I admittedly don’t know much/enough about any crypto and that’s why I don’t dabble.
tl;dr: crypto might be the future but it trades too similarly to stocks; with different asset classes I want things that move independently from other asset classes; yes I know I’m a (yung) boomer
SPACs
SPACs are special purpose acquisition companies. If there was a trend that took off during COVID-19 last year, I’d go with SPACs. Every other day some famous person or persons were forming SPACs left and right. The point of a SPAC is to acquire a private company and make it public, diverting the typical IPO process. I have two main issues with SPACs: 1) they seem to pop on rumors and selloff on concrete news (their price goes up when rumors are talked about and price comes back down when said rumors are confirmed); 2) the SPAC itself seems to make all the money while investors/private acquisition is left holding the bag (the SPAC and owners of said SPAC are the ones that benefit from the information disparity vs the investor, you, and the private company that they are acquiring).
I am oversimplifying here, and again, I am no expert (and don’t know much tbh) re: SPACs.
tl;dr: anyone(s) can start a SPAC if they have $, they acquire a private company and make them public without having to go through the typical IPO route
NFTs
NFTs are non-fungible tokens. These also blew up last year and continue to. Think of something real/tangible/physical digitized and coded to be unique. NFTs can be anything digital: a drawing, a video/moment in sports, etc. NFTs are each technically unique but where there is only one Mona Lisa, there might be 5, 10, or 100 NFTs of the same artwork, video, etc.
The power and value of NFTs come from the folks who want to own said NFT. I personally don’t need/want to own anything digital that’s rare to lord over my friends, but lots of people do.
tl;dr: NFTs are digital artworks that are technically all unique; the value/power of NFTs rest in folks demand/desire to own said NFT
Additional Alternatives
Here are a few additional alternatives I don’t know much about: Venture Capital, Venture Debt, Private Equity, Pre-IPO. Google is your friend.
You can get involved with Venture Capital by either being rich/knowing the right people or angel investing through something like AngelList. As far as pre-IPO investing goes, companies like SharesPost are making it easier and more accessible to invest in or sell Pre-IPO stock (that is a startup that is still private/not publicly traded yet).
Final Thoughts & Recap
I know this article was pretty nebulous, but I hope I gave you a better idea of some other asset classes and investment vehicles out there. The main takeaway here is that you don’t want all your eggs in one basket (unless you can predict the future in which case you want all your eggs in the best basket). Asset classes behave/trade independently of other asset classes–or at least should in theory. We want to build a portfolio where no matter what happens to one or two asset classes the portfolio is diversified enough that we can still grow to outpace inflation and our expenses.
Next week, I will walk through building a portfolio and highlighting some of the most prominent/popular portfolios people way smarter than me have constructed.
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Can you explain some of the charts? Also, how do these corporations at REITs do such a terrible job of investing in real estate?