Looking Beyond Stocks and Bonds

Stocks and bonds form the foundation of most portfolios, and for good reason. They are liquid, transparent, and relatively easy to understand. But they are not the only investment tools available. As investors look for diversification, income, or different sources of return, non-traditional investments often enter the conversation. These alternatives can play a role in certain situations, but they also come with trade-offs that deserve careful attention.

Private equity is one of the most talked about alternatives. At a basic level, it involves investing in companies that are not publicly traded. These investments aim to improve operations, grow earnings, and eventually sell the business at a higher value. Private equity exists because private markets allow for longer time horizons and less pressure from quarterly earnings expectations. The potential upside can be attractive, but access is limited, fees are high, and money is typically locked up for years. Valuations are not updated daily, which can make performance look smoother than it actually is. That smoothness is not the same as lower risk.

Private credit focuses on lending rather than ownership. Investors provide loans to companies outside of public bond markets and receive interest payments in return. This space has grown as banks have pulled back from certain types of lending. Private credit can offer higher yields than traditional bonds, but it often involves less liquidity and more complex risk. Credit quality, borrower concentration, and economic sensitivity matter a great deal. In downturns, defaults can rise quickly, and exiting positions is rarely easy.

Real estate syndications pool investor capital to buy and operate properties such as apartment buildings, office spaces, or industrial facilities. These structures allow individuals to access large projects that would otherwise be out of reach. Real estate can offer income and some inflation protection, but syndications are highly illiquid and dependent on the skill of the sponsor. Cash flow is not guaranteed, and property values can fall during economic slowdowns or periods of rising interest rates.

REITs, or real estate investment trusts, are often grouped with alternatives but behave differently. Publicly traded REITs own income-producing properties and trade like stocks. They offer liquidity and transparency while providing exposure to real estate cash flows. However, they are still subject to market volatility and interest rate sensitivity. REITs can diversify a portfolio, but they do not remove market risk.

Commodities include assets like oil, metals, and agricultural products. They exist as investments because they are tied to physical goods that support the global economy. Commodities can help diversify portfolios and hedge inflation in certain environments, but they do not generate income and can be highly volatile. Returns often depend on supply and demand cycles, geopolitical events, and currency movements. Timing matters more here than in traditional long-term equity investing.

Infrastructure investments focus on essential systems such as utilities, transportation, and energy networks. These assets can offer steady cash flows and long lifespans. Infrastructure exists as an investment category because these projects require large amounts of capital and long development periods. While infrastructure can provide stability, it is not immune to regulatory risk, political changes, or economic stress. Access often comes through private funds or specialized vehicles with limited liquidity.

Collectibles such as art, wine, watches, or rare items appeal to investors who enjoy tangible assets. These markets can produce strong returns in niche areas, but pricing is subjective and transaction costs are high. Liquidity is unpredictable, and valuations depend heavily on trends, taste, and buyer demand. Collectibles should be approached as speculative and interest-driven rather than core portfolio holdings.

Digital assets, including cryptocurrencies, are the newest and most debated category. They exist as investments due to technological innovation and decentralized networks. Digital assets can offer high upside, but they also come with extreme volatility, regulatory uncertainty, and operational risk. Price movements are often driven by sentiment more than fundamentals. For most investors, exposure should be limited and treated as speculative capital rather than essential savings.

The common thread across non-traditional investments is complexity. They can add diversification or return potential, but they also introduce challenges. Liquidity is often restricted. Fees are higher. Valuations can be opaque. Risk can be concentrated in ways that are hard to see until conditions change. Complexity does not automatically mean better outcomes.

The key question is not whether alternatives are good or bad. It is whether they solve a specific problem in your portfolio. If an investment improves diversification, aligns with your time horizon, and fits your liquidity needs, it may add value. If it is being added out of curiosity, fear of missing out, or marketing appeal, it is more likely to create friction than benefit.

Traditional investments are boring because they work. Alternatives should be used intentionally, not emotionally. Understanding how they function and what you give up in exchange for potential upside is essential before adding them to a plan.

Write to Marck Berotte at mberotte@aglaosconsulting.com