A new study by the Securities and Exchange Commission and FINRA finds that wealthy investors are increasingly turning to alternative investments, such as private equity and hedge funds, which they see as providing better returns than traditional securities like stocks or bonds. But the study also warns that these alternative investments aren’t without risk, so you should thoroughly understand what you’re getting into before you invest in them. Here are five key facts about alternative investments to keep in mind.
Wealthier, younger investors are searching outside of the stock market for greater profits.
A Bank of America Private Bank poll issued on Tuesday found that 75% of high-net-worth investors between the ages of 21 and 42 and 32% of investors over the age of 43 do not anticipate “above-average returns” alone from conventional equities and bonds. From May to June 2022, the company surveyed 1,052 high-net-worth individuals with at least $3 million in investable assets.
Furthermore, the survey indicated that 80% of these young investors are choosing so-called alternative assets, which are not included in conventional asset classes. Compared to older generations, younger investors devote three times as much money to alternative assets and just half as much to equities.
Alternative investments are being used by more advisers.
Hedge funds, private equity, “real assets,” such as real estate or commodities, and packaged investments known as “structured products” are the four main types of alternative investments.
According to a new poll by Cerulli Associates, advisers are increasingly turning to alternative assets as planners seek greater diversification in the face of double-digit losses in the stock and bond markets this year.
According to the Cerulli survey respondents, “reducing exposure to public markets,” “volatility dampening,” and “downside risk mitigation” were the three main justifications for alternative allocations.
Some of Scott Bishop’s customers utilise a percentage of their portfolios to teach their adult children about investing, according to the certified financial planner and executive director of wealth solutions at Houston-based Avidian Wealth Solutions. Furthermore, these younger investors are becoming more interested in alternative assets.
Everyone, he claimed, is “very concerned” about the stock market and, if they are in their 40s, “has definitely been burnt a number of times.”
Know your possessions and why you have them.
With increased interest in alternative investments, experts advise that before changing the allocations of one’s portfolio, one should be aware of the risks involved as well as the products themselves.
Know what you possess and why you hold it, advised Ashton Lawrence, a CFP and partner at Greenville, South Carolina’s Goldfinch Wealth Management.
A wide number of goods are now included in the category of alternative investments, and according to him, it’s important to know how an asset may do in various market scenarios.
To compare a sports vehicle to a minivan and ask why the minivan isn’t keeping up isn’t really fair, according to Lawrence. Obviously, depending on the economic environment, alternate investments may be either the minivan or the sports vehicle in that comparison.
Lawrence employs stock alternatives for client allocations to increase returns while lowering risk, while on the bond side, alternatives may act as a “stabiliser” for the portfolio.
He said, “I don’t have to outperform on the upside.” I don’t want to experience the entire extent of that market’s decline, though,
Alternative allocations for high-net-worth investors may differ according on their goals, risk tolerance, and portfolio size. However, for do-it-yourself investors without expert advice, a bigger percentage can be risky.