10 Alternative Investments to Diversify Your Portfolio

For many Americans, the most straightforward path to building a nest egg is to simply dollar-cost average into an S&P 500 index fund. With enough socked away into one every payday for the better part of a career, it becomes almost trivially simple for compounding to work its magic on your behalf.

Still, for reasons ranging from needing some money with higher near-term certainty than stocks to a wish to trade higher risks for higher potential returns, there are plenty of reasons to invest elsewhere. With that reality in mind, here are 10 alternative investments to diversify your portfolio.

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The beauty of cash is that a $1 bill can always buy 100 pennies, 20 nickels, 10 dimes, or four quarters. Although inflation does mean your cash will lose purchasing power over time, money remains incredibly useful as a means of buying stuff or paying bills.

Cash is also valuable because it’s the measuring stick that other financial tools are compared against. Whether it’s because you’re reaching a critical milestone, looking for ways to pay your bills in a down market, or simply keeping score, cash can still play a key role in your overall portfolio plan.

In today’s low interest rate environment, it may seem downright silly to own bonds. Still, there are good reasons to consider them for part of your portfolio. Bonds remain higher on the financial pecking order than stocks, which makes them a safer alternative than stocks.

In addition, you can get higher interest on investment grade bonds than you can in cash at the moment. That can make bonds a less ugly alternative than holding a lot of cash for a long period of time. Especially if you’re approaching retirement and need to keep a big chunk of money out of stocks to cover your bills, every little bit of extra boost helps.

Gold has long been viewed as a hedge against inflation. Whether or not that’s true over time is open for debate, but it and other precious metals still can serve a purpose in your portfolio. For one, in an “end of the world” scenario where fiat currency loses its luster, it is likely that such precious metals will still be a useful means of barter or exchange.

For another, gold, silver, and platinum can be worn in the form of jewelry and enjoyed as such, even if their investment value varies over time based on the hopes and fears of the market.

ALSO READ: Investing in Gold Stocks

Many people speculate in oil, natural gas, copper, cotton, and other useful commodities as part of their financial plans. The thing to remember about commodities is that their prices tend to be incredibly volatile, sensitive to economic cycles, and subject to boom and busts of their own.

After all, the old saying in the energy market is “the cure for high prices is high prices.” The higher the cost of a commodity, the more incentive there is to bring new capacity online to produce it. Increased capacity drives higher supplies, and thus, often, lower prices.

That cyclical nature makes it difficult to build wealth with commodities, but it does make them tempting tools for speculators looking for the opportunity to ride those cyclical waves.

Investors who believe that the U.S. faces special challenges that much of the rest of the world may be able to avoid could consider foreign currency as an alternative place to hold on to cash. Other countries have money, just like the U.S. does. If those other countries are better able to protect the value of their currencies, owning those currencies could provide positive returns in dollar terms.

Of course, that assumes those other countries are able to better protect the value of their currencies than the U.S. can. In a global recession that takes most major economies down, that may very well be easier said than done.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Bitcoin, one of the original cryptocurrencies, was designed as a decentralized, limited-quantity digital currency, available as an alternative to the government-printed, largely fiat currencies in circulation. The theory behind that is that hard-coded limits can help protect the cryptocurrency’s purchasing value from inflation, and the decentralized nature can protect its holders from a government’s collapse.

Whether or not that turns out to be true remains to be seen. In addition, while any given cryptocurrency may be limited, there have been a ton of new ones created, which is inflationary for the concept of cryptocurrency. Until the future plays itself out, it will be tough to see exactly what role cryptocurrencies will actually play. Between now and then, they may play a role as an alternative asset to consider to help diversify a portfolio.

ALSO READ: How to Invest in Cryptocurrency

The beauty of artwork is that it can be enjoyed by its owners even as it may potentially serve as an alternative investment at the same time. That -- possibly along with the fact that high price tags of famous pieces bring a bit of notoriety all by themselves -- makes artwork a popular alternative for the well-heeled.

The challenges with artwork are many, however. First, much art is sold at auction, where the fees and other transaction overhead costs can seriously eat into the investors’ potential profits. In addition, if a piece turns out to be stolen or counterfeit, the investor may lose the entire investment.

Whether it’s something like the U.S. $10,000 bill or an ancient coin from thousands of years ago, money that is no longer in general circulation could potentially be worth more than its original face value. It's popular among smaller investors, as certain classes (like old U.S .silver certificates) can often be purchased for a reasonable total outlay.

Like artwork, there’s a risk of counterfeits or fakes in collectibles. In addition, the condition of the item tends to matter a bunch. A high-quality bill that gets accidentally damaged could easily destroy a huge portion of that collectible’s previous value.

People generally invest in real estate for the income potential, the possibility that the investment could help protect against inflation, and/or as an active career as a landlord. Publicly traded real estate investment trusts are a way to buy real estate as a passive owner, but investors looking to play an active management role can buy properties directly.

When it works well, real estate can often generate cash for its owners, but it comes with significant up-front and overhead costs. You have to pay to insure the property, for instance, and taxes are often based on the property’s value. Those costs don’t go away if the property sits empty, which is a risk -- along with the potential that renters damage the place -- that real estate investors face.

ALSO READ: If I Could Redo My Real Estate Portfolio, This Is What I'd Change

If your portfolio is large enough -- or you’re somehow connected to one or more private businesses -- you may be able to invest a portion of your money in private equity. In general, any company not traded on public markets can be considered private equity, particularly if it has investors outside of its founders.

Although the potential for reward is real, so too are the risks. Financial reporting tends to be less transparent. In addition, it can often be tougher to get your money out of a private equity investment as there may not be an active market of others looking to buy its shares.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Alternative investments can play a role in your portfolio. If they don’t move in the same direction at the same time as your stocks, the diversification benefit could help you manage your money during rough markets.

Just remember that like any investment, these alternatives bring with them risks to go along with their potential rewards. Size your positions appropriately for the role that you want them to play, and review them regularly to make sure they’re still able to serve their purpose for you. If all goes well, one or more of these alternative investments could very well be exactly what your portfolio needed to get you through what otherwise would be trying times.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin. The Motley Fool has a disclosure policy.