Alternative investments/strategies have historically been used by large, sophisticated investors or institutions (pension plans, endowments, etc.) Why haven’t smaller investors been involved? The characteristics of this type of investing usually did not fit the goals/needs of the average investor. Alternative investments historically have been:
- Less liquid-thus not allowing easy access to the investor’s money in case the need arose,
- Less transparent in value-since many of the investments traded outside traditional markets making the determination of portfolio values more subjective,
- More risky-since many of these assets could lose a significant (all) portion of the investment, and,
- Long time frame-some investments (private equity) are designed to have life spans of 7-10 years.
Do alternative investments/strategies have a place in individual portfolios? Possibly-it depends on the goals/objectives of the individual. The biggest advantage is to diversify the portfolio. Alternative investments usually don’t provide the same level of return on the upside of the markets, but they also don’t lose as much in down markets. Therefore, using alternative investments can dampen the risk of the portfolio. We at Paragon Financial Advisors have investigated some alternative investment mutual funds and back-tested their use in integrated portfolios. Please call us and let’s discuss whether or not alternative investing has a place in your portfolio. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.