Volatile markets and the relatively high correlation we’ve seen between stocks and bonds mean more advisors are putting client money into alternative investments… and more clients are asking what they are. To help you explain, we put together this article that you can download, customize as you see fit, and share with your clients. If you’d like to learn more about how Advyzon helps firms track and monitor alternative investments, reach out today.
Many Americans link the word investing to the words stock and bond. But when both stocks and bonds fall, it can help to think about investing beyond them. Enter alternative investments, sometimes referred to as alts.
In general, the term alternative investments refers to investments outside the traditional asset classes—stocks (equities), bonds (fixed income), and cash. Alternatives can help you diversify your portfolio and manage risks.
Any investment that falls outside of the realm of stocks, bonds, and cash is generally considered an alternative investment. Not surprisingly, there’s a lot that falls into this bucket, so it’s helpful to categorize alternatives.
The most common types of alternative investments are:
- Private equity and venture capital: Investments made in private companies.
- Private debt: Loans issued to companies through private debt funds.
- Hedge funds: Investment funds aimed at achieving a high rate of return; investing in hedge funds is limited to affluent individuals and institutions.
- Real estate: Buying or managing property. This also includes investing in companies that buy or manage property, such as Real Estate Investment Trusts (REITs).
- Commodities: Investing in natural resources, including precious metals (gold and silver), oil, and natural gas. Often, this is done via futures contracts or investment funds, versus buying physical resources.
- Collectibles: Physical items intended to appreciate over time including art, classic cars, coins, and wine.
All of these investments come with varied pros and cons.
Cons of alternative investments. Many are illiquid, meaning you can’t quickly or easily convert them to cash. Unique
investments can also be harder to value—collectibles can be difficult to price and sell, real estate might fluctuate based on neighborhood crime as much as the economy, and so on. Finally, some of these investments are regulated differently than you may be used to—it may be harder to access historical performance data, and you may not always have regulatory protection or oversight. It’s important to research any investment and be mindful of scams.
Pros of alternative investments. Alternatives can help diversify investor portfolios. Many alts are considered non-correlated assets, meaning they tend to move differently from (and independent of) other assets. This can help mitigate losses in a downturn.
Some alts offer flexibility and freedom, as well. For business owners, commodity investments could help offset changing costs. For retirees, a real estate portfolio might boost income, and collectibles could fuel personal passion projects.
The short answer is yes, we can help you invest in alternatives. The longer answer depends on the type of alternative you’re interested in and the type of investor you are.
Regulators limit who can invest in certain things (for instance, you must meet Accredited Investor minimums to put money into many VC or hedge funds). Many private investments have similar (or even larger) requirements.
Beyond net worth or income limits, many alternatives require a hefty minimum investment and require you to stay invested for set time periods. Plus, the disclosure requirements for alternative products tend to differ from public investments, so you may have less information about how your investments are doing in the short term.
Over the past decade, the financial services industry pushed to make alternatives more accessible. These days, it’s possible to invest in mutual funds and exchange-traded funds (ETFs) that focus on alternative investments.
As with any investment, performance and risk vary widely depending on the product you’re using, the person selecting the investments, the fees involved, and more.
There’s a big difference, for instance, between an ETF that tracks the price of oil and investing in a hedge fund known for speculation. The former can be easily added to a client portfolio—ETFs are traded like stocks, and you can easily look up fund details and fees. The latter, on the other hand, tends to require a large investment and high risk tolerance; you may have very little insight into trades and performance in the short term.
Investing in alts may require a different type of expertise than investing in stocks and bonds. Often, there are different risks and timelines at play.
Financial advisors can access resources and fund managers that individual investors typically cannot. Beyond that, we understand your family’s goals, risk tolerance, and time horizon. We can discuss why you might want to add alternative investments to your portfolio, which products might work best for you, and how these choices would fit into your overall financial plan.
As interest around alts continues to grow, it’s exciting to see more accessible opportunities emerge for individual investors. If you’d like to learn more about how we can incorporate alternative investments into your portfolio, don’t hesitate to contact us.