Hot Topic: Alternative Investments Not Just For The Ultra-Wealthy?

For decades, alternative asset strategies have been accessible to the ultra-wealthy top 1% and institutional investor class as a way to diversify portfolios. 

Mainstream investing is typically limited to the stalwart asset classes of cash, bonds and stocks.   But recently, you may have noticed an uptick in headlines referencing alternative investments (not to mention the return of crypto bulls!).  There are a few key reasons why this is happening, and this is what I think is important to know:

What are alts?  “Alternative” assets cover a wide variety of assets, but what they share in common is the potential to offer performance that isn’t closely correlated with stocks and bonds.  Alts can be as simple as real estate or commodities or can be as complex as hedge funds and cryptocurrency.

Why Alts now?  There are a few key reasons why alternatives are in the headlines:

• Fee compression on traditional assets has left investment companies seeking additional revenue sources.  I think this is the single biggest factor.  When you consider that you can purchase an S&P 500 fund for little to no cost, investment companies simply can’t make as much money on traditional assets.  They are incentivized to broaden revenue sources and therefore have opened up asset classes that usually have higher minimums and higher fees to retail investors.

• The normal diversifiers have become less effective.  Bonds and Real Estate have normally been the go-to asset classes to diversify away from stocks.  However, since the pandemic concerns over fiscal spending have mounted and volatility in these safe haven assets has increased.

• A change in the regulatory environment. Amid the barrage of executive orders, you may have seen the news that the Trump administration issued the “Democratizing Access to Alternative Assets for 401(k) Investors” order.  This as well as the President’s outward embrace of cryptocurrency and the passing of the Genius Act, the first major cryptocurrency legislation, has been a stark reversal of the former trends toward alternative investment regulation.

• Performance trends.  As investors we are always looking for returns.  Bitcoin is a good example.  In 8 of the last 10 years it has outperformed every other asset class (In the 2 years it wasn’t, it was the worst performer.  A good reminder, diversification is important!).

  
  

Adding some alternative exposure to your asset allocation can be a good idea.  In fact, we utilize some alternatives in our portfolio models.  Alts can be used to improve diversification, add higher income generation or inflation protection, and enhance risk-adjusted returns.  They can also be used to gain exposure to new technologies. 

However, just like any investment, alts carry risk.  It’s always important to understand and evaluate what specific risks you are taking with an investment in order to access the potential benefit it may provide.  Here are some of the key risks that may be associated with alts in general:

• Liquidity.  This refers to the ease at which an asset can be bought or sold and importantly how fast it can be turned to cash.  Many alts are private assets.  Think about how long it takes to sell a real estate property vs. selling a stock in your brokerage account.  While there are many reasons to hold real estate in your portfolio, liquidity is not the primary advantage!

• Track record: Because of their nature, many alts may perform differently than a broad asset class, making it difficult to determine a track record.  In addition, some may have not been around that long.  Consider Bitcoin.  We have less than two decades of a track record, so we are still learning how this asset class responds to economic cycles.

• Complexity: Gaining comfort and confidence in an alternative asset class can be difficult, especially since traditional investments keep us busy.  Alts can have different rules and regulations that are important to be aware of.  Just like every investment, our mantra is we want to know why we own what we own and we want to invest with purpose!

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Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.