Alternative vs. Traditional Investments
Morgan Stanley produced a great tool highlighting the inherent differences between Alternative and Traditional investments, as seen below. Their opinion concludes that Alternatives can lower volatility and add diversification 1 to an investor’s portfolio.
Alternatives for Investors
Alternative investment strategies are considered those that are beyond the reach of equity and traditional fixed-income markets. What were once high risk, low participation investment vehicles: venture capital, real estate, hedge funds and (NTMF) non-traditional mutual funds, are now just some of the options today’s investors may find lucrative. Other alternatives for investors are infrastructure funds, climate related investments, global shipping containers, and hard assets, like precious metals, oil and gas, to name a few. One can profit from the economic growth right here at home, say, fracking operations. There is even a belief that sports betting and other forms of gambling are viable and legal alternatives for investors. The jury is out on that one, as far as I am concerned. Speaking of hedge funds, in September of this past year, Bloomberg reported, "Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion." Now that is an alternative of a different color. Another alternative for investors lies beyond domestic shores. An investor can profit from the economic growth in countries experiencing rapid evolution in stability. Rising incomes per capita and lower cost of food are great indicators of possible investment locations. Imagine investing in the implementation of electricity to a Sub-Saharan country, thereby opening up opportunities for lifting millions from poverty. Some are not even recognized as alternative investments. Berkshire Hathaway (BRK) is a fine example of what is considered traditional, yet is in fact managed like an alternative. Blending a variety of companies and industries with derivatives under a single brand, thereby managing risk, and sold on the stock exchange make for a non-traditional alternative.
Caveats to Alternative Investing
There are many alternative investment opportunities which have a steep barrier to entry. That is, although they might have less regulation over them, they may have significantly higher minimums, performance and management fees than do ETFs and mutual funds. Being subject to less regulation may sound appealing, but it also allows limiting published information and financial performance data that is much less than is ideal. Because alternative investing requires a significant amount of knowledge and experience, schedule a review of alternative investments with an experienced certified financial planner or investment brokerage. As for alternative investing options for retirement go, the use of your 401K or IRA can cost dearly when a prohibited transaction occurs. Because an individual cannot make financial gains directly in such a scenario, avoiding real estate investing is a sound idea. Failing to follow regulation may result in higher tax burden, as doing so may remove the tax deferred status of your portfolio. In the end, only the investor can decide which investment vehicles are the right fit. There are always new strategies and tactics emerging, so if not now, some day the right alternative may present itself.
No comments:
Post a Comment