4 Alternative Assets

Everything that does not fall into the categories of stock, bonds, or real estate is considered an alternative asset. This can be as simple as gold or as niche as collectible art and fine wine. Baseball cards and Pokemon cards are other prime examples. One of the distinguishing factors of these assets is liquidity. There is no open market for hundred-year-old bottles of wine or specific rookie baseball cards. When buying and selling traditional assets, you can expect your trade to settle quickly – sometimes within seconds. However, it often takes collectors several weeks to find buyers for their pieces – and the buyer and seller may have very different prices in mind.

If you have ever seen a show like Pawn Stars or Storage Wars, you may be familiar with this kind of exchange or trading. Oftentimes, the buyers and sellers have very niche areas of expertise and are able to leverage this knowledge for profit. For the average person, this is too time-consuming a hobby, and most alternative assets should be pursued as interests and not as investments. With that being said, alternative assets are also important for their ability to provide diversification. As the old saying goes, don’t put all your eggs in one basket. This is the basic idea of diversification and is a simple investment and asset ownership rule everyone should know. By owning assets that aren’t related, we assure that though one price may fall, another can rise. Over time, all assets tend to increase in price. So by diversifying, an asset owner can receive all the possible price increases. As mentioned before, most people don’t need to know about rare coins and wines – but there are a few alternative assets that everyone should be familiar with.

Gold is the oldest and most liquid of alternative assets. As a matter of fact, gold, along with real estate, might be the oldest asset in history. Gold is mentioned numerous times in the bible, and has been a source of currency for empires all throughout history. Gold is used in jewelry, which accounts for nearly 80% of its total use.^[1] Gold is also used in a variety of electronic components and industrial items, as it is a good conductor and stabilizer of electricity. Finally, gold is used in orthodontic applications, due to its malleable nature and hypoallergenic makeup. While these are all notable, gold is primarily valuable because of its long and cherished history. The most common way to buy gold is in the form of jewelry. Gold can also be bought physically, in the form of bars, coins, and tokens. Funds that track the price of an ounce of gold are also available in the same public markets that stocks and bonds trade-in.

Gold is the most purchased and well-known of the precious metals, but there are several other alternatives, including copper, silver, aluminum, zinc, and tin. All of these are used in a broad amount of electrical, manufacturing, and building products, and make up a key part of the industrial sector. Similar to gold, these metals can be bought directly in physical form, or can be bought in funds aiming to track the market prices of these assets. For everyday asset owners, anything besides gold and silver may be too expensive and complex to purchase – and given their notoriety, gold and silver may often be safer bets.

Gold, silver, and the other aforementioned metals are all examples of commodities. Commodities is defined by Oxford as “raw materials or primary agricultural products that can be bought and sold.” Commodities are some of the most liquid assets on earth. Due to their necessity in so many functioning parts of the economy, they are always being bought and sold to fulfill consumers’ and producers’ needs. Let’s take a look at a few examples. You go to pump your gas every couple of weeks, right? The base ingredient in gasoline is oil, which is a commodity. You may have coffee in the morning – there’s another. What about the local farmer who grows corn? Well, his end product is a commodity as well. The burger you had for dinner, and the chocolate cake you had for dessert, both have the commodities of cattle and cocoa in their making. Just like gold, commodities are an age-old asset. Since the beginning of time, humankind has assigned value to each of these items for their practical uses. As owners of assets, we can also be owners of commodities directly or indirectly. You can buy stock in companies that mine for gold or dig for oil. You can also buy funds that track the price of these items in the open market, just like with stocks and bonds.

A newer alternative asset that is making its first appearance this century is cryptocurrency. When you spend a dollar at the grocery store, you are using money that has been created and verified by our government. The United States dollar has been the world’s reserve currency since 1944, during the Bretton Woods Agreement post World War II.^[2] However, I’d like you to take a second and imagine what currency would look like if it weren’t backed and verified by a government. Without going into the minute details, cryptocurrency is decentralized, meaning it is not backed by any government and has no value as legal tender. Instead, the cryptocurrency is overseen by a massive amount of independent computers all around the world. These computers are all part of a huge open source network, known as a blockchain. Anyone can use their device to join one of these blockchains and participate in the network. When they participate, computers verify transactions over this network in order to make it more secure. There are thousands of blockchains and thousands of cryptocurrencies, all hoping to help users accomplish certain things. The first and most notable of the cryptocurrencies is Bitcoin. The story of Bitcoin is actually quite fascinating and I would encourage you to google it on your own. While cryptocurrencies may be new and exciting, it is important to really understand the use and technology behind them before deciding to invest. Only time will tell how it will perform.

The world of alternative assets is vast, so we have only taken a look at the most common forms. Alternative assets can also be very dependent on your own knowledge and location – you must know the market and assets in great detail. It is for this reason that your alternative asset buying should only make up a small percentage of your total assets – a small percentage of your portfolio.