While many individuals focus their investment strategy on stocks and bonds, it’s becoming increasingly common for savvy investors to look for alternatives outside of the stock market. Alternative investments can provide a dependable means of growing wealth over time and can be a prudent choice for people who are willing to invest over a long time frame in exchange for a higher return potential.
While alternative investments have become more mainstream since the 2008 financial crisis, there’s still an air of mystery about them for many people. In one 2014 survey, 42 percent of investors said they had no idea what the term alternative investments meant.
Alternative investments can be broadly defined as investments in any assets that aren’t stocks, bonds, or cash. In other words, alternative investments aren’t tied to the whims of the stock market. Some examples include:
- Cash-Value Life Insurance
- Life Settlements
- Merchant Cash Advance
- Real Estate
- Collectibles (g. wine, art)
- Precious Metals
- Private Equity
Investing in alternative assets can be a great way to diversify your portfolio and manage risk in the event of a market downturn. However, getting into alternative investing can be daunting for the uninitiated investor. It’s essential to perform your due diligence when deciding what alternative investments to add to your portfolio. Start by reviewing our recommendations below.
Look for Low Correlation with Other Investments
Ideally, you should be diversifying your portfolio by looking for alternative assets with a low correlation to your other investments. That way, if the stock market is experiencing a downturn, you won’t have to worry about all your investments taking a major hit. Fortunately, most alternative investments will have a low correlation with stocks and bonds because they will not be dependent on the stock market. However, there are exceptions. For example, if you decided to diversify with certain non-traditional bond funds that have a high correlation to equities, your investment will still be closely tied to the stock market.
Find a Money Manager You Trust
You’ll be hard-pressed to find alternative investments that you can buy online. In most cases, you’ll have to work directly with a money manager or wealth management firm.
When searching for a money manager, look for someone who has extensive experience and a solid track record with the specific type of alternative investment in which you’re interested. You should also look for someone who is transparent and can clearly explain the value and risks of alternative investments. Your money manager should be able to walk you through the fees you’ll need to pay and the return you can expect, as well as your options for withdrawing money from your alternative assets.
Evaluate the Minimum Investments and Fee Structures
Some alternative assets may require minimum investments that are prohibitive to the average investor. However, that doesn’t mean all alternative investments are off-limits. For example, Americans for Life offers affordable alternative investment strategies designed to help financially stable but cautious investors earn dependable returns for a comfortable retirement. It’s important to do your research and find out what alternative investments are available to you based on your current portfolio and retirement goals.
As you research alternative investments, keep in mind that many of these assets have higher upfront fees than traditional investments, but that the transaction costs are typically lower because there’s less turnover. You’ll need to look at the fee structure to determine if paying more now will deliver a better return later.
Evaluate the Tax Implications
One of the most important things to determine is whether the alternative investments in which you’re interested can be tax-deferred--as stocks and bonds can be in a 401(k) or IRA—or if you’ll be taxed on them annually. You’ll also need to look at whether the bulk of the investment’s income will come from short-term or long-term capital gains, as taxes will be higher on short-term gains. In some cases, you may be able to place alternative assets in a tax-advantaged account so that you can defer taxes or even benefit from certain exemptions. You’ll need to talk with your wealth management advisor to determine what’s best for your portfolio and long-term investing goals.
If you’d like to learn more about alternative investing and the investment opportunities that Americans for Life offers, please fill out our contact form or call us at (860) 426-2022.