31 Oct Examining the value of alternative investments

Q. When people talk about investing in alternatives, what does that mean?
— Learning

A. We’re glad you asked because alternative investments are an important part of a diverse portfolio.

When people think of investing, generally three categories come to mind — stocks, bonds and cash.

Alternative investments consist of investments other than these traditional categories, said Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway.

“Alternatives include investing in commodities, such as agricultural products or precious metals, real estate, currencies, private equity and hedge funds,” he said. “It can also include non-traditional investing strategies such as option trading and managed futures.”

McCarthy said many alternative investments have higher initial minimum investment and more expensive fee structures compared to mutual funds, exchange-traded funds (ETFs), or individual securities.

“Although alternative assets may have high initial upfront investment fees, transaction costs are typically lower compared to conventional assets, due to lower levels of turnover,” he said. “Many alternative investments are not traded on a public exchange and therefore can’t be liquidated easily and should be considered long-term investments.”

He said alternative investments often have complicated structures, and terms and conditions. You should have a thorough understanding of the investment before committing any capital.

McCarthy said alternative investments typically have a low correlation with stocks and bonds, therefore having them in a portfolio may create greater diversification which can reduce risk and may lead to greater risk adjusted returns.

“For the general investor, the amount and type of alternative investments they consider should be based on their overall investment objectives, time horizon and risk tolerance,” he said. “Regardless, no more than 20 percent of an investor portfolio should invested in alternatives, unless they are an accredited or institutional investor.”

McCarthy recommends you with a certified financial planner to determine if alternative investments make sense for you.

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The post was originally published in October 2017.