Is it time to buy alternative investments?

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In this miserable year for stocks and bonds, some investors are looking for more exotic places to get their money

The first rule of investing wisely is diversification. Hold a portfolio of stocks and bonds, say financial advisers, because if stocks go down, your bonds will come to the rescue and vice versa. Well, not this year.

Alternative investments include cryptocurrencies, gold and other commodities, income-producing real estate, private debt securities and private equity funds.

In 2022, stocks and bonds have generally been clubbed. The Standard & Poor’s 500 index (a basket of the 500 largest US stocks) is down more than 20%. And 10-year Treasury bills (the benchmark for mid-term bonds) lost more than 15% of their value due to soaring interest rates; when interest rates rise, bond prices fall.

“The Year We Feared”

“This is the year we were scared of, and now we have it,” Anastasia Amoroso, chief investment strategist for global financial firm iCapital, said at a recent Morningstar conference.

The hot period of the stock and bond markets leads some investors to invest in what are called alternative investments, hoping that they or they will produce decent yields.

At least 15 new alternative investment products will become available over the next nine months, Steffen Paul, founder of investment platform Moonfare, told the Financial Times recently. And a NASDAQ study predicted the alternative investment market could reach $17.2 trillion by 2025.

Should we take the leap?

What are alternative investments?

“There’s a whole big category of these other investments that carry the ‘alternatives’ label,” Pam Krueger, founder of financial advisor verification service Wealthramp, said in the latest episode of the ‘Friends Talk Money’ podcast. (Full disclosure: I co-host the podcast with syndicated personal finance columnist and author Terry Savage.)

Alternative investments include cryptocurrencies, gold and other commodities, income-producing real estate, private debt securities and private equity funds.

Some can only be purchased by “accredited investors,” which the Securities and Exchange Commission defines as people with at least $200,000 in income ($300,000 for married couples) in each of the past two or more years. net worth over $1 million, excluding their homes. And some “alts” require minimum investments of $75,000 or more, although lately there has been a push to lower the minimums and open up more alternative investments to the general public.

The search for returns

“As stocks and bonds have been on a downward trajectory here for some time, people are asking, ‘Can I please have something in my portfolio that is not drop? That I will be able to watch and have a smile on my face when I watch the actual results? ‘” Erik Olson, financial adviser at Arete Wealth Management in Chicago, said recently.

“As stocks and bonds have been on a downward trajectory here for some time, people are asking, ‘Can I please have something in my portfolio that is not drop?'”

In a recent survey of financial advisors by CAIS, an investment firm, more than three-quarters of respondents said they felt the traditional portfolio of 60% stocks and 40% bonds was “ineffective or less effective ” in the current economic climate.

The problem is that many alternative investments also had poor returns in 2022.

From January to early September, the price of gold fell by around 7%. “Gold is supposed to offset inflation, but gold hasn’t done anything” lately, Savage said. Real estate investment trusts (REITS) that buy apartments and commercial buildings have lost about 15% of their value.

And the price of Bitcoin – the largest cryptocurrency by market capitalization – has fallen nearly 60%. “Crypto is an alternative that is collapsing with the whole [stock] market,” Savage said.

Look long term

But it’s important to view investing as a long-term proposition, money professionals often say. This is why a growing number of them now recommend keeping a small portion of your investments in alternative investments.

“It makes a lot more sense to say, ‘I’m going to make small bets on a number of things. One or maybe two percent of your investment portfolio is probably a good number,” Olson said. So if the investment goes bad, you’ll only lose 1 or 2 percent of your portfolio. probably not derail your overall financial future,” he said.

Olson added that he’s heard some investors say they’re putting all their life savings into an alternative investment. “It’s a formula for disaster,” he said.

Questions to ask before investing

Savage is generally not a fan of alternative investments. “You have to ask yourself, ‘Who is selling this to me? What are the real costs? And how are you going to get out when you want to sell?'” she said.

She calls them “the investment cockroach motel” – easy to get into and nearly impossible to get out of. This is because there is no listed market for many of them.

On the other hand, listed alternative investment managers have more freedom to focus on long-term results because they don’t need to focus on daily and quarterly results, as CEOs do. of listed shares.

Know the risks and disadvantages

However, there is no denying that alternative investments are riskier than traditional stocks, bonds, mutual funds and exchange-traded funds.

“Just because you box Accessing alternatives doesn’t mean you should.”

“They are not subject to the same level of regulatory scrutiny and oversight as publicly traded investments,” Krueger said. It can therefore be difficult to know who is behind them, how they are performing and how well (or poorly) they have performed.

“Just because you box accessing alternatives doesn’t mean you should,” Krueger said. His advice: If you want to get into alternative investing, first discuss the idea with a fiduciary financial advisor who represents your best interests and won’t pocket commissions from the companies whose products they recommend.

Also beware of high expenses. A writer from investment site Motley Fool said 90% of private REITs, for example, charge “unreasonable commissions and fees” of up to 12%.

The Fraud Factor

Caution is required when it comes to alternative investments.

The Securities and Exchange Commission has accused a real estate and alternative investment firm of fraudulently collecting $13.5 million from more than 100 “Ponzi-style” investors by promising to pay them returns of typically 10% a year. .

Losses from cryptocurrency scams totaled $700 million in the first half of 2022, and precious metals fraud cases have increased 84% since 2019, according to the North American Securities Administrators Association (NASAA).

The Financial Industry Regulatory Authority’s arbitration boards received more than 400 complaints from investors against REITs last year, The Wall Street Journal reported. Most of the complaints were about non-traded REITs — a popular alternative investment that isn’t bought or sold on public exchanges, so it doesn’t need to comply with exchange rules regarding financial disclosure.

NASAA said it plans to crack down on untraded REITS. He plans to ban people from putting more than 10% of their liquid net worth in an unlisted REIT.

Alternatives to alternatives

There may be alternatives to alternative investments that are worth considering.

Savage thinks people who are now looking for safe havens for their money with reasonable returns are taking advantage of Treasury bills and short-term notes. They paid about 4%.

Rising rates have also led some banks to offer 3% to 3.5% on 1 to 5 year certificates of deposit. Additionally, there are income-producing stocks that currently yield around 5%.

Photograph by Richard Eisenberg
Richard Eisenberg is the former senior web editor for Next Avenue’s Money & Security and Work & Purpose channels and former site editor. He is the author of “How to Avoid a Midlife Financial Crisis” and has served as personal finance editor at Money, Yahoo, Good Housekeeping and CBS MoneyWatch. Read more
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