Many of us have an investment portfolio or work retirement plan. Investing is an important component for retirement planning and financial independence. We saw however in the 2008 financial crisis that sometimes investing can produce losses, not gains! The three main traditional asset classes to invest in have been stocks, bonds and cash. Recently, another asset class known as “alternative investments” has become more popular. Alternatives Investments have proven to be an excellent way to lower risk, boost income and gains, and also serve as a great tool for diversification.
Although AI’s have been around for a while, the use of AI’s has increased significantly in recent years to a record level of $6.5 trillion in 2011, growing seven times more than the traditional asset classes during the past five years. Large endowments such as Harvard and Yale (which have consistently delivered high double-digit returns with lower risk) have up to 40 percent of their investments in AI’s! What do these endowments and institutional see in AI’s? Can the average investor take advantage of them?
The AI category is quite broad and includes “tangible” or “hard” assets such as real estate, commodities and currencies, and financial assets such as private equity, senior secured loans, hedge funds, managed futures and venture capital, among many others. These investments sound complicated and difficult to understand. To some degree they are, which is why in the past only the wealthy investors had access to them.
One of the main reasons many invest in AI’s is because of lower correlation with traditional investments. AI’s can reduce the overall risk of a portfolio through diversification and also provide more consistent returns. This means that the values of AI’s are generally unrelated from traditional investments and do not move in tandem with each other. In other words, if the market moves down, AI’s in general may not fall as much or even go up in value. With major market events affecting all investments, investors are increasingly looking for other ways to diversify and reduce their risk.
AI’s offer another line of investments that can expand and diversify sources of return in a portfolio. The persistent market volatility may be a good reason to look at AI’s to enhance a traditional portfolio. Daniel Peters with WealthBridge Inc. adds “This can give more opportunities to generate higher returns while reducing overall risk in different market environments. A carefully constructed portfolio combined with traditional and alternative investments may be important as the global and U.S. economies become increasingly interdependent.”
Historically AI’s only have been available to large, institutional investors. In recent years however more AI’s have become available to the general public, giving more people the opportunity to invest in AIs. You can buy AIs through advisors that offer them. Another benefit for some investors is that the usual 7-8% commission with these AI’s can be credited to the client. Daniel Peters states ,”Since we are a Registered Investment Advisor (RIA), we don’t charge commissions, so any commission associated with an alternative investment goes to the client! So a $100,000 investment can potentially be $107,000 on day one!”
As always, be sure to check with a professional to see if investing in AI’s is right for you. It is important to have realistic expectations on any investment portfolio, and chances are if some investments seem too good to be true, they may be! AI’s may enhance your portfolio, but keep in mind: Like other investments, past performance is no guarantee of future results. Although there are no guarantees in the investing world, doing your homework and research with any investment can improve chances of meeting your investment and financial goals!