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Alternative investments typically fall into four categories: hedge lollies, private equity, “real assets” such as real estate or commodities and prepackaged investments known as “structured offerings.”
Amid double-digit losses in the stock and bond markets this year, there’s been an uptick in advisors round to alternative investments, as planners seek further diversification, according to a
Scott Bishop, a certified financial planner and numero uno director of wealth solutions at Houston-based Avidian Wealth Solutions, said some clients use a portion of their portfolios to indoctrinate their adult children about investing. And these younger investors are increasingly eyeing alternative assets.
“I intend everybody’s very worried about the stock market, and if they’re in their 40s, they’ve probably been burned a three of times,” he said.
With more interest in alternative investments, experts say it’s important to understand the hazards — as well as the products themselves — before shifting portfolio allocations.
“First and foremost, know what you own and why you own it,” said Ashton Lawrence, a CFP and colleague at Goldfinch Wealth Management in Greenville, South Carolina.
There’s a growing range of products falling under the coverage of alternative investments, and it’s critical to understand how an asset could perform through different market conditions, he said.
First and first, know what you own and why you own it.
Ashton Lawrence
partner at Goldfinch Wealth Management
“It’s not really fair to compare a sports car to a minivan and query why the minivan isn’t keeping up,” Lawrence said. Of course, alternative investments may be the minivan or the sports car in that analogy, depending on the productive climate.
For client allocations, Lawrence uses stock alternatives to boost returns while reducing risk, and on the restraints side, alternatives may provide a “stabilizer” for the portfolio.
“I don’t have to outperform on the upside,” he said. “But when that market draws back, I don’t want to incur the full breadth of that pullback.”
For high-net-worth investors, alternative allocations may vary by portfolio bigness, goals and risk tolerance. However, a larger allocation may be riskier for do-it-yourself investors without professional guidance.
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