Explore Our
“Off The Wall” Blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
Investing in Alternatives
Considerations to keep in mind when investing in alternatives.
Alternative investments are becoming more common among retail investors. The adviser community has a better understanding of the potential advantages of adding alternative investments to client portfolios as a way of diversifying and, hopefully, further managing risk in client accounts. Many advisers seem to be managing their clients’ assets in a manner similar to the way large institutions and endowments manage their assets. The overall differences between managing the two are many, but for this post, I will concentrate on the use of alternative investments.
It is well documented that institutions and endowments generally have better long-term performance than the average investor. I believe the use of alternative investments plays a role in this outperformance.
Alternative Investments May Outperform
I recently returned from a conference in New York on alternative investments where it was noted that not only the number of advisers using alternatives but also the percentage of client assets invested in alternatives has been increasing. The percentage of alternatives used in the panelists’ client portfolios varied from a low of 10 percent to a high of 30 percent. This is different from what you may find in the portfolios of large institutions and endowments, where it is not uncommon to have allocations of 40 percent to 60 percent or more invested in alternatives.
The Definition of an Alternative Investment
Another topic of discussion at the conference was the definition of alternative investments. Most attendees seemed to have a similar but slightly different opinion. The differences generally came down to what types of assets are included in the definition. Real estate was the most common difference. To provide a definition of an alternative investment, I turn to Wikipedia, which states that an “alternative investment is an investment product other than the traditional investments of stocks, bonds, cash or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins or stamps and some financial assets such as commodities, hedge funds, venture capital, film production and financial derivatives.”
Alternative Investments and Liquidity
A question faced by retail investors is how to participate in these asset classes with modest sums of money and the possible need for liquidity. The answer is that it’s very difficult. Many of these assets are not liquid investments unless you happen to be an art/wine/antiques/real estate/commodities/film distributor and venture capitalist all in one. My guess is that leaves most of us out.
In an effort to solve this problem, most investors turn to mutual funds, of which there are plenty to choose. However, the funds themselves are not necessarily investing in actual hard or tangible assets. A fund may instead be investing in the stocks or bonds of the companies that produce those assets, which brings the investor back to where he started: investing in stocks and bonds, although indirectly.
Diversifying Alternative Investments
While it is true that historically, different asset classes tend to move separately in various economic environments and having a diversified portfolio of alternative mutual funds can potentially help smooth out investor returns, it is also true that in periods of severe uncertainty, it doesn’t matter what the funds invest in, but rather how they own the assets. The point I am trying to make is that if the fund owns stock and bond shares, in times of uncertainty the fund will likely react like a stock or bond.
There is no easy answer to this problem, but there are some potential strategies. Having a long-term financial plan and a knowledgeable and trusted adviser can help.
Read the article on U.S. News & World Report here! >
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for individuals. To determine which investment is appropriate, please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.