Along your investing journey, you may come across various investment prospects or a desire to invest in something unconventional.

I’m not talking about public stocks and bonds that everyone can buy. I’m referencing ‘alternative investments’.

What Are Alternative Investments?

Alternative investments refer to assets that are distinct from traditional investments such as stocks, bonds, and cash.

A few examples:

• Private Equity: investments in companies that have yet to go public, or buy out public companies.
• Private Real Estate Investment Trusts (Non-Traded REITs): investments in residential or commercial properties that are not available in the public markets.
• Hedge Funds: pools capital from accredited individuals or institutional investors and then utilizes a variety of strategies, such as short selling and leveraging, with the goal of generating high returns.

Benefits Of Owning Alternative Investments

Disadvantages Of Owning Alternative Investment

With non-traded REITs, the management fee can range from 1-2%, there can be a performance fee on top of that, AND there is usually an upfront fee that goes to the advisor/broker who sold you the product.

Don’t think those percentages seem high? Consider this, Jeremey Siegel provided the following analysis in his legendary book, Stocks for the Long Run:

Often these products require your money to be tied up for a certain amount of time or else you pay a ‘redemption’ fee. This time period varies. For non-traded REITs that can be as short as one-year, with private equity, your funds may be tied up for several years (maybe 4-10 years) before there is a liquidity event.

Also, consider when things start to turn, people run for the exits, and they, the private REIT, have the ability to stop redemptions.

So, should you need your money, and they are not accepting redemptions or offering a liquidity event, too bad…

Key Takeaways

In a low interest rate environment, like we saw over the past decade, investors sought higher returns. This resulted in taking on more risk and potentially investing in alternatives.

Let this serve as a reminder that, while there are benefits with these products, there are always risks, just like investing in traditional assets.

Understand the risk of your investments. Consider what would happen if an emergency came up and you needed access to your money. Ensure you have enough ‘liquid’ capital to cover these potential needs.

This podcast can be helpful to learn more about private equity and the implications we saw in 2022.

Also, never fun to see this story on a cover of a magazine…

Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing includes risks, including fluctuating prices and loss of principal.