“Alternative Investment” is a common term used in the investment world. For the purposes of this discussion we will consider it to mean any investment that is not traded in the Stock Market or the Bond Market.
- Real Estate is probably the most commonly held Alternative Investment. It can be held as Direct Ownership where title is held directly by an individual such as a rental home, or Fractional Ownership as a share in a Real Estate Investment Trust (REIT), or Partnership along with other investors. Although some REITs are actually traded in the Stock Market (“Traded REITs”) most actually started their lives as private offerings to investors outside of the market (“Non-traded REITs”). Common Real Estate categories include Residential, Office, Retail and Warehouse/Industrial.
- Life Insurance and Annuities. These are actually contracts that are made between an individual or special entity and a Life Insurance or Annuity company. Annuity contracts are set up with fixed or variable return rates based on various market returns. The contract benefits usually fall into two broad categories, Living Benefits, associated with Income payouts, or Death Benefits, associated with lump sum payouts. These benefits are guaranteed by the company issuing the contract. This guarantee can relieve and Investor of some of the market risk in stock or bond investing. A way to understand this investment market it is to realize that Annuity contracts often consist of a large current payment (the “Premium”) to the issuing company in exchange for a stream future payouts (the “Benefit”) to the Investor. Conversely, Life Insurance contracts consist of a current stream of Premium payments in exchange for a large lump-sum Benefit payout in the future. The issuing companies simply make their profit on the spread between these current premium payments and the payout of future benefits.
- Hedge Funds and Futures Contracts. These are more sophisticated investment vehicles that involve contracts written against market performance, arbitrage on mergers and acquisitions in the market as well as foreign currencies. Arbitrage is the practice of taking advantage of valuations that are perceived as mispriced in the market. They often involve smaller high-risk investments that are targeted for outsize returns.
- Commodities and Currencies. Typical commodities are of Oil and Gas, Precious Metals (i.e. Gold or Silver), Base Metals (i.e. Copper or Aluminum), Agricultural Products (i.e. Wheat or Soybeans). They can be held directly (i.e. Gold Coins) or they often take the form of futures contracts that are traded in the own unique markets that may or may not be correlated to the Stock and Bond Markets. One of the newer investment vehicles that may fit into this category are cryptocurrencies such as Bitcoin. This is could be considered as an undeveloped market that is highly speculative and volatile.
- Private Debt and Private Equity. One of the newer investment vehicles is the private placement of debt for mid-sized companies that too large to borrow from banks and too small for a debt offering in the Bond Market. Business Development Companies (BDCs) organize these offerings and sell them privately to sophisticated investors through the Broker/Dealer network. There are also offerings organized to pool investor funds and invest in start-up or later-stage financing of growing companies looking to raise equity privately.
- Conclusion. Alternative Investments are a good way to diversify and round out an Investment Portfolio without further exposure to Stock and Bond Markets. They are often used to dampen volatility (market price swings) and stabilize of a portfolio to smooth out investment returns. Many Alternative Investments also produce regular cash payments that may greater than the Bond Market but can be obtained with less risk. They should be considered as part of a sophisticated Investment Portfolio. Some of these Alternative Investments can only be obtained through a full service Financial Advisor.
Views, opinions and analyses expressed in this presentation are those of Southwestern Retirement and not those of Independent Financial Group, LLC.
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Southwestern Retirement Planning Advisors, Inc. is not affiliated with Independent Financial Group LLC.
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