Are alternative investments right for your portfolio? Allworth Partner Advisor Victoria Bogner, CFP®, CFA, AIF®, breaks down the key points to help you answer the question.
Investing is no longer just about stocks, bonds, and mutual funds. Enter the world of alternative investments. You might have heard the term thrown around at fancy parties or in the latest finance podcast, but what exactly are they? Let’s break it down in a way that’s easy to understand.
Alternative investments (or alts, for the finance-savvy) are those investments that don’t fit into the traditional categories of stocks, bonds, or cash. Think of them as the hipster cousins of the investment world. They’re unique, trendy, and a bit mysterious. Here are some popular types of alternative investments:
- Private Equity: Buying a stake in private companies, not listed on stock exchanges.
- Hedge Funds: Pooled funds that use diverse strategies to generate returns, often in both rising and falling markets.
- Real Estate: Investing in property—commercial, residential, or even land.
- Commodities: Physical assets like gold, silver, oil, or agricultural products.
- Collectibles: Rare items like art, antiques, wine, or even classic cars.
- Cryptocurrency: Digital currencies like Bitcoin, Ethereum, and the like.
You might wonder why anyone would stray from the tried-and-true stock market. Here are a few reasons why alts are gaining popularity:
- Diversification: Alts often behave differently from stocks and bonds, which can help reduce overall investment risk. When traditional markets zig, alts might zag.
- Potential for High Returns: Some alternative investments can offer significant returns, especially if you get in early or pick the right asset.
- Inflation Hedge: Assets like real estate or commodities can be good hedges against inflation, meaning their value can rise as the cost of living goes up.
Let’s get into the nitty-gritty of how alts stack up against more familiar investments:
- Liquidity: Stocks and bonds can typically be bought and sold easily. Alts, not so much. Real estate can take months to sell, and private equity investments might lock up your money for years.
- Valuation: The value of stocks and bonds is pretty transparent and easy to find. Alts can be trickier—how do you value a Picasso or a startup that’s not yet profitable?
- Access: Anyone with a brokerage account can buy stocks. Some alts, like hedge funds or private equity, require you to be an accredited investor (meaning you need a certain level of income or net worth).
- Fees: Alternative investments often come with higher fees. Think management fees, performance fees, and even transaction costs.
Alts can be like the wild west of the investing world—exciting but potentially treacherous. Here are some pros and cons:
Pros:
- High Reward Potential: That piece of art you bought on a whim could appreciate significantly over time.
- Diversification: They can provide a cushion against market volatility.
- Unique Opportunities: From crowdfunding startups to owning a slice of a wind farm, the opportunities are endless and often thrilling.
Cons:
- Risk: High rewards come with high risks. You could lose a lot of money, especially if you don’t do your homework.
- Complexity: Understanding alts often requires a higher level of expertise and due diligence.
- Illiquidity: Your money can be tied up for longer periods.
Ready to dive into the world of alts? Here’s how you can start:
- Do Your Research: Knowledge is power. Read up on different types of alternative investments, their risks, and potential rewards.
- Start Small: Don’t go all in. Start with a small portion of your portfolio to get a feel for how these investments work.
- Consult a Professionals: Talk to your Allworth advisor and our investment team, who specialize in alternative investments. They can provide insights and tailor your investment strategy.
Alternative investments aren’t for everyone. They require a willingness to take on more risk and often, more capital. However, they can be a valuable addition to a diversified portfolio, offering unique opportunities and potential rewards.
Before diving in, weigh the pros and cons, do thorough research, and talk with your Allworth team of professionals. Remember, the world of alternative investments is vast and varied—with big risks and various rewards.
So next time you hear someone talking about alts, you’ll know they’re not just speaking in code. You’re now equipped with the knowledge to join the conversation and maybe even start exploring some alternative investments for your own portfolio.
Past performance may not be indicative of future results. Asset allocation does not ensure profits or guarantee against losses; it is a method used to manage risk. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment, investment allocation, or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Allworth Financial), will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Advisory services offered through Allworth Financial, an S.E.C. registered investment advisor. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Allworth Financial is an Investment Advisor registered with the Securities and Exchange Commission. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC.