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Innovative Ways Investors are Diversifying their Portfolios

Posted On Friday, 05 July 2024 11:20
Innovative Ways Investors are Diversifying their Portfolios Image by pch.vector on Freepik

Investments are never guaranteed to be a success, but investors who know how to play the game diversify their portfolios in order to reduce risk and maximize returns. If you’re looking for ideas for diversification, here are some innovative opportunities.

1. Private investments

Publicly available investments can be quite profitable, but there is untapped potential in private investments, and it’s worth considering because the returns can be much higher. Invest.net claims, "By adding private market assets to your portfolio, you increase the potential of bolstered returns and enhanced portfolio diversification." 

To qualify for investing in private markets, you need to be an accredited or institutional investor. If that’s something you’ve been considering for a while, now is a great time to get accredited so you can pursue private, alternative investments.

2. Interval funds

Although they lack liquidity, interval funds have some surprising benefits. They most commonly invest in credit and don’t trade on an exchange and provide investors the opportunity to redeem their shares at set intervals, like quarterly or annually. Also, the tax reporting is less complex. However, there is no guarantee you can sell all the shares you want during a redemption period.

Although some minimum investments are as high as $25,000, sometimes you can invest in interval funds with as little as $10,000, but the expense ratios can be as high as 3%.

The returns are generally higher than open-end funds, but the downside to interval funds is that there are restricted selling opportunities, which makes them more of a long-term, illiquid investment.

3. Nontraded real estate investment trusts (REITs)

REITs are popular for good reason. They give investors access to various commercial real estate assets that provide dividend-based income, transparency, liquidity, and protection against inflation. Most REITs with commercial holdings have agreements in place to allow for rent raises that accompany inflation. The dividends are typically higher than common equities because they have a more favorable tax structure.

Another benefit to REITs is that they follow the typical 10-year real estate cycle rather than the bond-and-stock-market cycle, which lasts around 5.75 years.

4. Registered funds of funds (FOFs)

FOFs invest in portfolios of other funds. Registered FOFs are attractive because they have lower income requirements and the minimum investment amounts are lower than private FOFs.

Registered funds of hedge funds are great because hedge funds are proven to be resilient even in volatile equity markets and drawdowns. A big tax benefit is the 1099 reporting, which is much easier than the K-1 forms investors get for private funds of hedge funds. However, the downside is there are higher fees.

5. They’re buying collectibles

Collectible investments, like comic books, baseball cards, action figures, art, cars, and other items, can be profitable as long as you’re willing to part with the item when it comes time to sell. Unlike people who collect items for nostalgic purposes or just as a hobby, investors who go for collectibles intend to make a profit by selling.

Like every investment, there are risks and rewards associated with owning collectibles. The biggest downside is that there is no guarantee they’ll sell in the future. Selling collectibles to private parties is usually more profitable than selling to businesses, but there’s no way to know what the demand will be like in the future.

The other thing to consider is the way collectibles are taxed. If you own a collectible for more than one year and sell it at a gain, you will owe long-term capital gains taxes of up to 28%. However, if you sell it before one year, you’ll only have to pay your regular income tax rate on the gain.  

6. They’re investing in cryptocurrency

Although the value of cryptocurrency has fallen since Bitcoin hit $73,844, it’s still a good investment for those willing to take the risk. However, Bitcoin halved on April 20, 2024, which will likely keep the value from spiking that high from here on out. Still, Bitcoin isn’t the only cryptocurrency around, and plenty of people have been making money trading and selling on various exchanges.

Alternative investments are profitable

Most alternative investments are attractive because there are fewer regulations from the SEC, but they are also typically illiquid. There are pros and cons to alternative investments overall, but each opportunity needs to be looked at individually because they are not all alike.

While most alternative investments require investors to be institutional or accredited investors, that’s not always the case. For instance, real estate, cryptocurrency, and collectibles are available to anyone.

If you’ve been thinking about pursuing alternative investments, talk to a financial advisor first. Many alternative opportunities can be profitable, but you really need to know more about each option before going all-in.

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