More Advisors Are Using Alternative Investments
Alternative investments typically fall into four categories: hedge funds, private equity, ‘real assets’ such as real estate and commodities, and pre-packaged investments known as ‘structured products’.
Advisors are increasingly turning to alternative investments as planners seek more diversification amid double-digit stock and bond market losses this year, according to a recent study by Ceruri Associates.
According to Cerulli survey respondents, the main reasons for alternative allocations were ‘reducing public market exposure’, ‘limiting volatility’ and ‘protecting downside risks’.
Scott Bishop, a certified financial planner and executive director of wealth solutions at Houston-based Avidian Wealth Solutions, said he uses a portion of the portfolio to help clients educate their adult children about investing. He said there are. And these young investors are increasingly turning to alternative assets.
“I think everyone is very worried about the stock market. If you’re in your 40s, you’ve probably been burned a few times,” he said.
“Know what you own and why you own it”
As interest in alternative investments grows, experts say it’s important to understand the risks and the products themselves before changing portfolio allocations.
“First and foremost, you need to understand what you own and why you own it,” said Ashton Lawrence, CFP and partner at Goldfinch Wealth Management in Greenville, South Carolina. there is.
He said the range of products that fall under the alternative investment umbrella is expanding, and it’s important to understand how assets perform in different market conditions.
First and foremost, understand what you own and why you own it.
Partners at Goldfinch Wealth Management
“It’s not fair to compare sports cars to minivans and question why minivans are lagging behind,” Lawrence said. Of course, an alternative investment could be a minivan or a sports car by that analogy, depending on the economic climate.
For allocations to clients, Lawrence uses stock substitutes to boost returns while reducing risk, and on the fixed income side, substitutes could provide a portfolio “stabilizer.”
“I don’t have to be upbeat and outperform,” he said. “But when that market recedes, I don’t want to suffer the full extent of that recession.”
For high net worth investors, alternative allocations may vary depending on portfolio size, goals and risk tolerance. However, larger allocations can be riskier for investors investing on their own without professional guidance.