Shifting Perspectives and Portfolios with Alternative Investments

Shifting Perspectives and Portfolios with Alternative Investments

May 01, 2024

I love a good perspective changer. A rule breaker. An earth shaker. There isn’t all that much room for them in finance, but alternative investments might be just about as close as you can get.

"Alternative investments" is an umbrella term for a disparate range of investment strategies and assets that might be best defined as investments that use a different approach from traditional instruments.

At their core, alternative investments are any financial assets that do not fall into one of the conventional investment categories, such as stocks, bonds, and cash. 

I’m going to throw in a little real-world analogy to break it down further. Because if you’ve been around these parts much, you’ll know I love a good analogy, especially when discussing rule breakers.

So let’s talk about Pearl Jam. I know, I know. Stay with me here…

Rocking Out in the Investment World

It feels like yesterday that this GenX’er witnessed Pearl Jam play at Lollapalooza.

Pearl Jam played a pivotal role in catapulting grunge into the mainstream consciousness during the early 1990s. Emerging from Seattle's alternative rock scene alongside bands like Nirvana and Soundgarden, Pearl Jam's raw energy, introspective lyrics, and intense live performances resonated with my new-to-college vibe.

Pearl Jam successfully brought grunge and ‘alt rock’ to the forefront of mainstream music, leaving an indelible mark on the landscape of rock music and popular culture.

So to bring things full circle here: Just like the 90s West Coast music scene, alternative investments are fast becoming one of the most innovative and exciting parts of the investment landscape. Alternative investments are the Pearl Jam of the investment world. 

Moving into the Mainstream

Alternatives are now mainstream. Demand has been driven from investors in pursuit of improved portfolio diversification, higher investment returns, and strong risk-adjusted returns. In fact, alternative investments are expected to grow $8 trillion between 2022 and 2028.1, 2

The impetus behind this projected growth is the belief that alternative investments offer the potential to enhance the risk/reward characteristics of a traditionally diversified portfolio. Meaning that investors most often turn to alternatives to potentially help diversify an investment portfolio and reduce overall portfolio risk.3

While today's portfolios may benefit from some diversification to alternative investments, it should be emphasized that the risk, return, and market correlations will vary widely among them. Consequently, individuals need to consider what their objective is for adding alternative investments and select the appropriate strategy to pursue their needs.3

Types of Alternative Investments

Since alternatives are considered riskier investments, they often have the potential for higher returns compared to traditional investments. They can be outlined in the following core groups:

  • Private Equity: Seeks to participate in the growth of private companies. Private equity is an illiquid asset class that seeks long-term appreciation away from public markets.
  • Hedge Funds: Investments that have broad flexibility in the types of strategies they can employ to follow their stated investment objectives.
  • Commodity Pools: Enterprises that attract funds from people who are looking for pool managers to engage in commodity-related trades.

With a low correlation with the stock and bond markets, alternative investments are more likely to maintain their values in a market downturn. Hard assets such as gold, oil, and real estate are effective hedges against inflation.

Most alternative investments also have fewer regulations from the U.S. Securities and Exchange Commission (SEC) and proportionately tend to be illiquid. Common forms of alternative investments include real estate, commodities, cryptocurrency, and collectibles.

Who are Alternative Investments Best Suited For?

Alternative investments have traditionally been geared towards institutional or "accredited", "qualified" investors who are considered high-net-worth individuals with investment experience, and these investments usually have high minimum investment requirements. But alternative investments have become increasingly feasible to retail investors via alternative funds. 

Some investment companies have structured mutual funds after alternative investments, providing individuals with access to the investment strategy while offering daily liquidity at lower minimum investment requirements.With access opened up, private individual investors are allocating increasing amounts to alternative investments. 

Alternatives are particularly well suited to those people looking to bring a little more interest into their financial lives. Perhaps you collect vintage cars, or sports memorabilia, art, antiques, wine… alternatives can help you make money from things you feel passionate about. 

Not only does this make investing more interesting, but the likelihood of it being more difficult to sell collectibles due to a smaller pool of potential buyers makes the market less liquid, boosting the return on your investment.

We can Help Put a Different Spin on Your Portfolio

Just like grunge fashion trends of the 1990s went mainstream and made it into my closet, alternative investments are showing up in the portfolios of more and more Truman Wealth clients. 

As a woman-owned and run independent financial planning firm, we know a thing or two about shifting perspectives and bringing the alternative into the mainstream. We know the value of mixing passion and personality with the traditional.

In the words of Eddie Vedder:

“Leave it to me as I find a way to be

Consider me a satellite, forever orbiting

I knew all the rules, but the rules did not know me.”

Whether you need help choosing between Doc Martens or the combat boots, or between private equity or hedge funds, please reach out to schedule a call with our team today.  

Mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

  1., October 19, 2023
  2. Alternative investments include direct participation program securities (partnerships, liability companies, and real estate investment trusts which are not listed on any exchange), commodity pools, private equity, private debt, and hedge funds. These programs may offer high-net-worth accredited investors tax benefits, but they have significant risks associated with them. Typically, alternative investments are illiquid investments and their current values may fluctuate from the purchase price. Statements for such investments represent their estimate of the value of the investor's participation in the program. The estimated values may not necessarily reflect actual market values or be realized upon liquidation.
  3. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. 

This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.