7 Alternative Investments to Diversify Client Portfolios
Financial advisors often discuss stocks, bonds, and cash with clients. But alternative investments can also provide valuable portfolio diversification. Here are seven alternative investments to consider.
Alternative investments cover assets outside the standard categories. These include real estate, fine art, and cryptocurrencies. Alternative assets behave differently compared to traditional investments. This makes them useful for refining overall portfolio performance.
1. Private Equity
Private equity involves investing in non-public companies. Investors can join private equity funds or become angel investors. Private equity funds pool money to invest in private firms, similar to mutual funds. However, they are not SEC regulated and target accredited investors. Angel investors provide capital to startups and often play active roles. They offer expertise and networks that help businesses grow.
2. Venture Capital
Venture Capital (VC) is a type of private equity for early-stage startups. It funds companies with high growth potential. Earlier, only accredited investors accessed VC funds. Now, platforms like SeedInvest serve a broader audience. VC investments involve significant risk due to the uncertain future of startups. However, the potential for high returns draws many investors.
3. Hedge Funds
Hedge funds are pooled investments using complex strategies. They trade in distressed assets, derivatives, and currencies. Hedge funds seek high returns, often using leverage. Because they are less regulated, they are only open to accredited investors. While offering high liquidity, hedge funds can be more volatile than traditional assets.
4. Private Debt
Private debt refers to loans made to businesses or individuals. These loans offer higher returns compared to public debt securities. Investors can directly loan money to businesses, securing assets as collateral. Alternatively, they can join private debt funds for a diversified approach. This investment is crucial when businesses can’t get affordable bank loans.
5. Real Estate
Real estate is very accessible as an alternative investment. Traditional investors buy properties for rental income or resale profits. Those seeking less involvement can use real estate crowdfunding platforms. Platforms like Fundrise or real estate investment trusts (REITs) simplify real estate investment. Real estate offers tangible, less complex investment options.
6. Commodities
Commodities include raw materials like metals and oil. They hedge against inflation as their prices rise with it. Investors can purchase commodities directly or through futures contracts. An example is the Perth Mint Physical Gold ETF. Commodities provide portfolio diversification and protection against economic downturns.
7. Life Settlements
Life settlements involve buying life insurance policies at a discount. Investors later collect the full death benefit. This investment is low-risk since policy values are guaranteed. The main uncertainty is the insured’s lifespan. Life settlements offer potential returns unlinked to market conditions. Investors can buy policies directly through auctions or invest in life settlement funds. These funds offer diversification within the life settlements market. Though management fees apply, they simplify the investment process.
Benefits of Alternative Investments
Alternatives provide asset diversification and tax efficiency. For example, you can hold alternative assets in self-directed IRAs. They offer tax-free contributions and tax-deferred earnings. Investing in personal interests makes alternatives appealing. Clients find it rewarding to invest in passions like classic cars or fine wines.
Risks of Alternative Investments
Potential risks include higher volatility and lack of pricing transparency. Many alternatives aren’t exchange-traded, so their values aren’t constantly updated. This lack of liquidity requires investors to hold these assets longer. Sound understanding and risk acceptance are crucial for successful investing in alternatives.
Why Consider Alternative Investments?
Alternative investments offer unique benefits. They diversify client portfolios and hedge against market volatilities. Each type has specific advantages, such as inflation hedging or tax efficiency. They help insulate wealth from broader market and economic issues.
Our Expertise
We understand the need for diverse investment options. We provide opportunities to invest in life settlements, a stable alternative. Feel free to explore our offerings. We aim to help you meet financial goals with various investment strategies.
