The Growing Trend of Alternative Investments Are You Ready for the Risks

Explore the captivating world of alternative investments with our insightful article. Uncover why nearly 60% of Americans are eager to venture into this growing trend. Delve into the potential risks that come with it. Don’t miss out on understanding this exciting opportunity.

Discover the increasing popularity of alternative investments as revealed by a recent survey conducted by NerdWallet. Close to 3 in 5 Americans express their interest in exploring alternative investment options in the future. Dive deeper into this fascinating trend and learn about the potential risks involved.

Recent economic upheaval may have Americans questioning: Is there a better, safer place than the stock market for me to invest for the future?

Close to 2 in 5 U.S. adults (38%) invest in securities — like stocks and bonds — but just 16% of Americans invest only in securities, according to a new NerdWallet survey. So what are the others investing in alongside, or instead of, traditional securities? Alternatives.

“Alternative investment” is a catchall term for just about any asset that isnt stocks, bonds or cash. This includes real estate outside of a primary residence, commodities (like gold or oil), cryptocurrencies (like bitcoin), art and more. Also known as “alts,” these investments can net higher returns than the stock market. But they may also be a riskier choice, with higher fees and less liquidity. Still, Americans are interested.

In a survey of over 2,000 U.S. adults commissioned by NerdWallet and conducted online by The Harris Poll, we asked Americans what they invest in, what theyre interested in investing in and why. We also asked whether or not they think its a good time for them to put money in the stock market.

Key findings

• Stock market skepticism: One-third of Americans (33%) dont think now is a good time for them to invest in the stock market, including within a retirement account. Among them, more than half (51%) say theyre afraid to invest due to market volatility.

• Alternatives appeal: Close to 3 in 5 Americans (59%) are interested in investing in alternative investments in the future, including real estate (33%), commodities (25%) and cryptocurrencies (21%).

• Diversification a priority: More than 2 in 5 Americans interested in alternative investments in the future (44%) say its because they want to diversify the types of investments they have; over a third (36%) say its because they think they can get a better return with alternative investments than they could with traditional stocks and bonds.

Stock market sentiment is split

Investing in stocks remains one of the best ways to grow your money over time. But right now that’s not a consensus belief among Americans — 38% think its a good time for them to invest in the stock market, while 33% dont think its a good time and another 29% arent sure.

Millennials (ages 24-39) are the most likely to say its a good time for them to invest in the stock market: More than half (51%) say this, compared to 41% of adult Gen Zers (ages 18-23), 39% of Gen Xers (ages 40-55) and 28% of baby boomers (ages 56-74). Ranging from their mid-20s to almost 40, millennials are at a crucial point in their lives and have a lot to gain by investing now toward their future goals. They still have time to take advantage of the benefits of long-term investing.

Among Americans who think now is a good time for them to invest, more than half (53%) say its because they can make a good return. And about a third (31%) say its because they invest no matter what the market is doing.

On the other hand, among Americans who dont think now is a good time for them to invest in the stock market, around half (51%) say its because theyre afraid to invest right now due to market volatility. Close to 3 in 10 (29%) say its because they need to hold on to more cash these days, which makes sense as the COVID-19 pandemic has upended the finances of millions.

What you can do: When finances are tight, having cash on hand is more of a priority than investing for the future. But its important to avoid letting volatility keep you from investing once you feel secure with the amount you have stashed in savings.

“If youre investing for the long term, you can expect market volatility from time to time,” says Arielle OShea, NerdWallets investing and retirement specialist. “But you can also largely ignore it. Investors with a long time horizon dont need to react to even steep market crashes, because history tells us the market recovers — and then some — over time.”

Its also important to note that even if you have only a small amount to invest — say, $25 per paycheck — thats OK. Investing early and often adds up over time. Invest what you reasonably can and increase the amount as youre able.

Alternative investments pique Americans interest

Theres considerable curiosity around alternative investments: Close to 3 in 5 Americans (59%) say theyre interested in investing in alternative investments in the future, with the most intriguing alt being real estate.

What you can do: If youre interested in alts, its important to know your options along with their potential downsides. Alternative investments may be a great option for your investment portfolio, but they can come with more risk and higher fees than something like an index fund, so you want to know what youre getting yourself into.

Read up on any potential alternative investment to see if it’s a good option for you given your personal risk tolerance, the amount of money you have to invest and the time youre willing to put into managing the investment. We have guides on bitcoin, real estate investing and buying gold to get you started.

“In most cases, alternative investments are going to take more research than traditional securities, and they require more due diligence on the part of the investor,” says OShea. “Be sure you have the time and willingness to do that work.”

Diversification, higher returns biggest reasons for alts interest

Potential investors have varied reasons for seeking out alts. More than 2 in 5 Americans interested in alternative investments in the future (44%) cite wanting to diversify the type of investments they have as a reason they are interested in them. This is especially true for those with household income of $100,000 or more – 53% say this, compared to 38% of those with household income of less than $100,000.

A quarter of Americans interested in alternative investments (25%) say its because they think the stock market is too volatile, and around 1 in 8 (12%) say its because they dont understand how the stock market works.

While the stock market may be volatile, some alternative investments are arguably more prone to unpredictable ups and downs. They may also be more challenging to understand than the stock market. Index funds, meanwhile, can easily diversify a persons portfolio without costing a lot in fees, and theyre relatively hands-off.

What you can do: Alternative investments may have a place in your investment portfolio, but they shouldnt be the whole of it. Financial experts recommend that if you invest in alternative investments, they should make up no more than 10% of your investment portfolio. So instead of choosing between securities or alts, what about a good balance of both?

“Generally speaking, alternative investments should make up a small portion of your portfolio rather than the bulk of it,” says OShea. “Long-term investors should put most of their portfolio in low-cost index funds that track a broad stock market index.”

Methodology

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from July 28-30, 2020, among 2,012 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Marcelo Vilela at mvilela@nerdwallet.com.

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