MoneyDo: Know What You Own: Alternatives


Throughout the year, we’ve been encouraging you to know what you own – beyond the name of the investment, to what type of investment, what’s in it, and how it affects your portfolio, and ultimately, your financial plan.

In the last part of Moneydo’s “Know What You Own” series, we ask you to take a look at your Alternative Investments.

Alternative investments is a catch-all category that doesn’t not fall into one of the conventional asset classes like a stock or a bond. An Alternate Investment might be currency, hedge funds, private equity, collectibles, commodities or real estate.

You might notice when studying the many types of alternative investments that you probably don’t have those sorts of investments in your portfolio. A few reasons why this might be the case:

  • Currencies – which include cryptocurrencies like Bitcoin – are very hard to analyze and typically are held by professional traders speculating on currency moves. Another entity that may hold a currency investment is a large bank or global company hedging against currency risk.
  • Hedge funds grab headlines – there’s even a television series about a diabolical hedge fund manager – but they’re generally not held by the majority of investors. Hedge funds build reputation by being exclusive, and are often only available to those who have a certain level of net worth or annual income. For the vast majority of investors, investing in a hedge fund or in a private equity fund, are just not going to be an option.
  • Collectibles would include sports cards, vintage cars, wine, exclusive liquor, or art. Recently, the internet has made it possible for actual collectible exchanges, like Liv-ex and Bourbon-ex. Still, public trading of collectibles isn’t widely-used. Instead, many collectibles exchange hands through private auctions.

Collectible values go up or down based on the uniqueness of the item and the demand based on who might be at the auction. Perhaps more than other investments, the economy tends play a large part in the willingness of high net worth investors spending on high value items collectibles.

If you do hold Alternative Investments in your portfolio, it’s likely one of two types: Real Estate or Commodities.

Real Estate includes anything from direct ownership of your residence, to a rental property where you’re the landlord and rent out to a tenant, to a real estate investment trust (REITs) in which there is professional management running many properties for you. REITs are structured as partnerships and can invest in anything from data centers, cell phone towers, strip malls, hospitals, apartment buildings, and hotels.

Typically, REITS are structured to pass along income to their shareholders at a rate of greater than 90% of profits. Investors turn to them for exposure to real estate without having to personally manage property.

Commodities include things like energy, metals, agriculture, and livestock. Most investors recognize the two most popular commodities: gold and oil. Many investment sites and channels will display the movement of gold and oil as bellwethers for the direction of the economy.

The change in oil prices, for example, has the ability to change our day to day lives as gas combustion moves our vehicles. But oil prices can also add to production and delivery costs for major corporations, impacting the bottom line. 

Oil prices can even go negative!  In April when everyone was stuck at home, the lack of demand caused the price to go below 0.   Because of the cost of storing oil, traders were willing to pay someone else to take oil from them, because they did not want to be stuck with having to store it.

Gold and other precious metals are usually held for one of two reasons:

  • Some investors hold them as an inflation hedge. Historically, as inflation has risen, so has gold prices.
  • An insurance policy for a recession or economic depression. Many people flocked to gold in 2008-9 in the depths of the great recession or this year when fears were at their highest due to the virus.

If you’re considering investing in alternative investments, one path you could consider is instead of buying them yourself, invest in companies that work specifically with those commodities. One good example of this strategy would be if you think that oil prices are going up, to buy an energy company like Chevron or Exxon Mobil; or if you think gold is going up, invest in a company that mines gold or provides mining equipment.

One danger of Alternative Investments is that they may seem more personal or more “fun” than a “traditional” investment. But Alternative Investments require the same degree of careful planning and scrutiny as any other investments. Your planning and retirement goals remain the same, regardless of what investment you’re employing to get there.

If you’d like help or insight on planning or how to manage your alternative investments, find an advisor you can trust who isn’t going to give you a list of products to buy. Head to our website and click on the ‘Get Started’ button to learn more about how Annex Wealth Management can help.