While most investments fall into one of two categories, Stocks or Bonds, there are numerous other places to invest, including options, futures, commodities, forwards, SWAPs, and a universe of non-Exchange Traded investments referred to as alternative investments. Examples of alternative investments are antiques, art, automobiles, coins, precious metals, real estate, stamps, structured cash flows, settlements, and even rare wines. Most of us already have some experience with alternative investments without realizing it.
Why are these considered “alternative investments?” The main reason is simple; they are NOT traded on an exchange. That’s it!
Many brokers and advisors speak ill of alternative investments, but that’s generally because they have no access to these products, or simply are not allowed to sell them, and thus have no way to make money if you choose one of the investments. Just like an insurance agent will speak ill of the stock market and a broker will hostilely warn against annuities and insurance, in both cases because they cannot sell the product, so their job is to convince you why their offering is better, and that ‘alternatives’ are ill advised. That’s not real advice, it’s just salesmanship.
There are two principal reasons that an investment will fall into the ‘alternative’ category: liquidity and valuation.
Liquidity is defined as “the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.” Both stocks and bonds are highly liquid investments and change ownership frequently on a well-defined marketplace (an exchange, like the NYSE, NASDAQ, CBOE, etc.). This high frequency and wide trading also leads to better pricing, meaning that you can be pretty sure what the value of your investment is and what you can get for it when you sell it at any point in time, with relative ease. When you sell a stock, you can have access to your proceeds within 1 to 3 days. Individual bonds may take a couple of days to settle, but you can almost always convert your bonds to money in short order. Selling Real Estate, for example, a so-called “alternative investment” is, however, more complex.
The second reason, Valuation, is the process of determining the value of an asset. Both stocks and bonds have well established methodologies for valuation, with thousands or even millions, of investors contributing to the market price. Even though such valuation may be less than optimal for equities, it is still far more defined than for alternative investments, like Real Estate.
Alternative investments are often illiquid, and can be much more difficult to value. As such, alternative investments require more specialized knowledge to value and may take weeks or months to liquidate to cash. As a result, the market of investors is usually considerably smaller. However, investors have long utilized alternative investments as a way to enhance their portfolio returns, achieve greater diversification, and disconnect some of their portfolios from the stock market. To continue our Real Estate example, the exact value/price is negotiated, and the final price isn’t known until the actual sale consummates. This does not make alternative investments bad, simply different, and there are many such investments with a long established track record.
Matrix Private Wealth Solutions has the Knowledge and Expertise to Advise You on Alternative Investments
Because these investments require some specialized knowledge, much higher due diligence is necessary for advisors and investors. Most advisors simply don’t have the license, or the skills, or the authority, to work with many of these investments, so they tend to be less than encouraging when asked about them. And as a result, they will likely never even discuss them with their clients, which is why many such investments are not known by most investors. As with all investing, if you don’t know what you are doing, you could get yourself into a lot of trouble. It’s learn, or get burned. Experts and professionals generally agree that new investors should focus on building a financial foundation, but they disagree on what constitutes a solid foundational investment.
People often think of alternatives as ‘speculative’, but many are not. In fact, it is interesting that people will invest in high risk stocks, which are often far more speculative, yet they feel comfortable with that simply because it is traded on an exchange and everyone else is doing the same. Safety in numbers, so to speak. If you want to incorporate some investments that have zero market correlation, or rental income, or a systematic monthly income, alternative investments may provide better options.
There are many products in the alternative investments category that may be a suitable fit for a well-designed plan. These can include Life Insurance and Annuities (though technically most life insurance and annuities are not considered investments but are often treated as alternatives to investments in the formulation of a Wealth Management Plan), Structured Cash Flows, and Life Settlements. Until we, and YOU, understand your situation, goals, objectives, risk tolerance, and your future plans, we cannot, and will not, recommend anything. Once we get to the point of making appropriate recommendations, because we are an independent firm, we are not limited to any single financial product or provider, but are free to search the marketplace for solutions that best suit each client’s unique needs.
Because we already adhere to the Fiduciary standard, we must, both by law and code of ethics, provide solutions in the best interest of our clients. A duty we take very seriously, and which only a small percentage of our industry is governed by, or adheres to.