At Henssler Financial, we believe long-term investors with investment horizons of 10 years or more should stay invested in the stock market through high-quality stocks. While this may make us sound pretty vanilla, we believe our philosophy of buying high-quality stocks is a time-tested and pure way to grow long-term investment capital without incurring unnecessary risk; however, there is no guarantee that any investment strategy will be successful because all investing involves risk.
Alternative investments go beyond the traditional stocks, bonds and cash. They include commodities, real estate, hedge funds, private equity, structured products, futures, currencies and even art, antiques, gems and collectibles. Most true alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, high risk factor, limited regulations and relative lack of liquidity. Still, average investors have increasingly begun to explore alternative assets classes in recent years to increase their returns or diversify their risk.
Many investors like to diversify their stock portfolio with real estate. Rather than dealing with the hassle of being a landlord, investors often look to real estate Investment trusts (REITs) because they allow you to invest in real estate without a significant capital requirement. REITs sell like stocks on the major exchanges or over-the-counter markets. Real estate has a relatively low correlation with the behavior of the stock market and is often viewed as a hedge against inflation, because as inflation increases, often so does the value of the real estate.
Gold is often a favorite among investors because it has attributes that make it appealing from an investment perspective. Gold can provide a hedge against inflation and a declining dollar; therefore, most investors buy gold for its ability to retain value. However, gold has its drawbacks. First, since gold is a “store of value” instead of an “income generator,” it does not produce income like a stock or bond, it simply stores value. Secondly, gold is a commodity, and commodities in general seldom outperform other financial assets over the long term because technology tends to reduce the amount used in finished goods. The primary use of gold is in the production of jewelry, and jewelry is a consumer discretionary good, which can see a downturn in tough economic times. If you want to invest in gold, we recommend an exchange-traded fund (ETF) that invests in gold, rather than the shiny metal itself. Investing in a gold ETF generally, allows you to track the market price of gold; minimizes the commissions, and eliminates the security and storage issues that come with owning a 10-ounce gold bar.
Hedge funds are private investment funds that are free to invest in almost any investment opportunity, utilizing a broad array of investment strategies with limited rules that govern their existence. Many hedge funds invest in stocks, bonds, commodities and currencies. They are typically considered an alternative asset class because of their ability to implement complex investing strategies that involve many other asset classes and investments. They can also employ the use of leverage. Hedge funds should not be viewed as a separate asset class. Instead they should be viewed as an alternative way to access existing asset classes. However, hedge funds tend to be suitable and limited to investments from individuals with a net worth greater than $1 million and institutional investors.
Private equity represents an ownership interest in a company, but unlike stocks, the company is not traded on the public market. Private equity can be used for startup companies, mid-growth stage companies or used to fund a buyout of a distressed company in hopes of turning it around and selling it at a profit. It typically requires a relatively large investment and is often only available to qualified, high-net-worth investors.
A fundamental rule of investing is understanding how your investment makes money. While alternative investments may seem simple on the surface, they often do not have clear financials or regulatory oversight like publicly traded companies.
If you have questions regarding how an alternative investment would fit in your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.