When America entered the stock market in the 1700s, only stocks, cash, and bonds were available to investors. But since 1924, Americans have made mutual funds a reliable investment tool. But are mutual funds still alternative investments today?
Mutual funds are considered alternative investments by many, but they don’t generally meet the most accurate definition of these investments. Alternative investments are any financial asset that’s not stocks, bonds, or cash, while mutual funds are essentially collections of these securities.
The rest of this article will discuss mutual funds and other alternative investment options. It then explains why alternative investments are often riskier than traditional investments, and helps you determine why they should still be a part of your portfolio.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is an Alternative Investment?
Investopedia defines an alternative investment as one that “doesn’t fall into one of the conventional investment categories.” It means, they exclude traditional asset classes such as cash, bonds and stocks.
But therein lies the first problem: Today, most investors consider mutual funds to be “conventional” because they have efficiently invested in them since 1924. So, it’s no surprise that they think of these funds as alternative investments.
Additionally, considering that America has been in the stock market business since the 1700s, where stocks, cash, and bonds have been the only option, it’s easy to see why investors may look for the next new investment vehicle to diversify their financial portfolios.
On the other hand, it’s difficult for many investors to believe mutual funds fall into the alternative investment category because financial managers often advise their clients to invest in mutual funds as safety nets that should be a part of all financial portfolios. And, many retirement and pension plans are made up primarily of mutual funds.
Alternative Investments get their name because they’re not stocks, cash, or bonds; however, they get their reputation because they’re most often riskier than traditional forms of investing.
When many investors think of alternative investments today, they think of aged wine, rare coins, and exquisite art. Though extremely valuable, these investments represent many challenges for investors, making them riskier than owning stocks and bonds.
For example, you may own a rare coin, and perhaps there are only five others like it in the world. Because of its rarity, your coin may be worth more than 100 shares in Apple stock; however, finding another investor who wants to purchase your coin makes this alternative investment riskier. It also carries the potential for more reward, though.
Alternative investments are considered riskier investments for several reasons other than matching buyers to sellers. For example, there’s much less transparency and liquidity with alternative investments than stocks, bonds, or cash.
While the same can be said of mutual funds, this investment vehicle is valued at the closing of each day, so are mutual funds alternative investments? I don’t personally think so.
Reasons Mutual Funds Are Not Really Alternative Investments
All of this is exciting information, and it points to why people question if mutual funds are, indeed, alternative investments. The most prevailing reason they’re not alternative investments is that not every investor has access to alternative investments, yet everyone has access to mutual funds.
Only accredited investors and qualified purchasers have access to alternative investments. The accredited investors must have income exceeding $200,000 for the preceding two years or have a net worth of over a million dollars. And the numbers aren’t easy to reach for everyone.
In contrast, although many mutual funds have minimum purchase requirements, investors aren’t required to be insanely wealthy or be considered sophisticated investors to purchase mutual funds.
Further, fund managers need special training and must pass exams from the Financial Industry Regulatory Authority to offer alternative investments. Selling mutual funds is a part of general education for fund managers.
Clearly, mutual funds aren’t cash, bonds, or stock, but neither are they under such stringent guidelines both for selling and purchasing.
Still, mutual funds don’t have a unique ticker. They’re not stocks, cash, or bonds, and not traded on the stock market, so they’re considered alternative investments. Yet, they’re one of the safer alternative investments.
Why Do People Invest in Alternative Investments?
Many people invest in risky alternative investments simply because they can. If they lose on the acquisition, they have other assets that shore up that loss. They can also ride out bad markets longer than average investors. Still, all financial portfolios should have a percentage in alternative investments, mainly since mutual funds are defined as alternative investments by many.
Other reasons include:
- There’s little correlation between the stock market and alternative investments, so there’s more potential for diversification, reducing risk.
- Usually, less volatility exists with alternative investments. For example, farmland is considered an alternative investment, and it has shown less fluctuation and more profit than either the stock market or commercial properties over the last ten years.
- Many create passive income. For instance, real estate is an alternative investment that provides monthly payments to landlords.
- Generally, alternative investments generate higher returns. According to Farm Together, both farmland and timberlands brought an average ten percent return between 1992 and 2018.
Types of Alternative Investments
Since mutual funds are considered alternative investments, it’s good to know what else falls into this category so that you can select wisely. Following are some examples along with their benefits.:
- Gold may improve strategic allocations and offer support against inflation. Historically, gold outperforms broad commodities during periods of significant inflation.
- Real estate, whether through REITs or by purchasing tracts of farm or timberland, can help balance a portfolio, provide cash flow, and offer many tax advantages.
- Hedge Funds are typically limited to accredited investors, and they’re by far the riskiest of the alternative investments mentioned so far. Still, they also have the potential to provide the most significant rewards.
- Art is attractive to many investors because it often outperforms all other investments. It’s risky, though, because the investor is betting on price appreciation of something that cannot be easily quantified.
- Private Equities are similar to hedge funds in terms of risk, requiring a substantial initial investment. They have the potential of achieving a high return, though, within four to seven years.
Education Materials To Consider
Many books are written on alternative investments because there’s much to learn and much to earn. A few of our favorite Amazon books are listed below.
- The Alternative Investment Almanac is only available as a Kindle edition because it was just published. It’s valuable for novice investors because it offers a solid introduction to several non-traditional asset classes, along with pros and cons for each.
- The Only Guide to Alternative Investments You’ll Ever Need provides extensive information on twenty alternative investments, including structured investment products, real estate, precious metals, and fixed annuities. The authors explain how each asset works, which ones you should avoid, and how to get started.
- The Handbook of Traditional and Alternative Investment Vehicles is a valuable book covering both traditional and alternative investments. And it primarily focuses on the benefits and pitfalls of each product.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Although mutual funds fit the literal definition of artificial investments, they no longer fit the spirit of the definition. Alternative investments offer a more balanced approach to investing. Still, you have to do your due diligence because despite the potential for greater rewards, the risks are more significant too.
The same rule of investing applies with alternative investments. Don’t invest in anything you cannot explain, and always seek advice from your financial advisor; just don’t be afraid to think outside of the stock market investing box.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
