Alternative assets open up new ways to grow wealth and add diversity to a portfolio — but they’re not equal. Choices like peer-to-peer (P2P) lending, cryptocurrencies, fine art, farmland and music each come with a unique mix of risks and rewards. Some can be more volatile, offering faster returns, while others provide steady growth and returns over time. The right choice depends on your individual goals and comfort with risk.
Dennis Shirshikov, head of growth at Summer and professor of finance at the City University of New York, offered some unconventional asset choices that have the potential to outperform traditional real estate, which has seen a median return of 8.6% annually, per SoFi.
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Here are five unconventional assets that could outperform traditional real estate.
Peer-to-Peer Lending
According to Shirshikov, P2P lending generally offers returns between 5% and 12%, depending on loan risk profiles. “The advantages of P2P are the potential for better returns compared to traditional fixed-income investments and the ability to spread investments across multiple loans to mitigate risk,” he said.
However, the drawbacks of this option, per Shirshikov, are borrower defaults, which can lead to the loss of principal, and liquidity constraints, meaning that funds are tied up until loans are repaid.
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Cryptocurrencies
Shirshikov said that while cryptocurrencies can be highly volatile, returns can exceed 100%. Bitcoin, for example, is up over 100% for the year. However, Shirshikov acknowledged that these investments can also experience significant losses.
He pointed out that some of the advantages of investing in cryptocurrencies are significant appreciation in short periods and lower entry barriers for individual investors. Drawbacks include potential dramatic price fluctuations within short time frames and the existing uncertainty in legal frameworks governing cryptocurrencies.
Fine Art and Collectibles
“Expected returns for fine arts and collectibles can range from 5% to 15% annually, depending on the piece and market demand,” Shirshikov said. He said a pro of these investments is that they are physical items that can appreciate over time. Plus, they offer portfolio diversification due to having a low correlation with traditional markets.
However, one of the disadvantages of these types of assets is their illiquidity. “Selling art can take time and may incur high transaction costs,” he said. Not only that, but expertise is required, according to Shirshikov. “Success often depends on knowledge of the art market,” he explained.
Farmland
“The expected returns for farmland investment are historically around 10% to 12% annually when combining income and land appreciation,” Shirshikov said. “Advantages include less volatility than stock and real estate markets. Additionally, farmland often retains value during inflationary periods.”
However, Shirshikov added that this asset requires significant capital investment and is subject to operational risks, such as weather conditions and commodity price fluctuations.
Music Royalties
It’s possible to invest in music royalties without having any connections to the music industry. Platforms like Royalty Exchange and SongVest allow investors to invest in assets ranging from music catalogs to trademark royalties.
Shirshikov said that yields can vary but often range from 8% to 12% annually. “Music royalties are a noncorrelated asset that’s independent of stock market movements,” he explained. “But the income depends on the continued popularity of the music and requires understanding of intellectual property rights.”
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This article originally appeared on GOBankingRates.com: These Unconventional Assets Could Outperform Traditional Real Estate — Should You Invest?
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