Alternative Investing: It’s More than Stocks and Bonds

By Troy Fore, CFP®

Often, significant wealth is about more than stocks, bonds, cash, and other listed or exchange-traded securities. In fact, many investors are also passionate collectors of art, vintage automobiles, coins, stamps, and even comic books. And these collectibles are often quite valuable. For example, did you know that a mint-condition copy of the first Spider Man comic book, published in 1963, recently sold at an auction in Texas for $1.4 million? Not a bad return on the original cover price of twelve cents.

Collectibles are typically classed as “alternative investments,” as are other asset types, such as digital assets (think Bitcoin and non-fungible tokens or NFTs), private equity or credit (sometimes called “peer-to-peer lending”), antique or luxury automobiles, commodities, and even real estate. While many alternative investments are open and available to anyone, others have special net worth and other requirements for involvement. And no matter what type of “alt” you may be interested in pursuing, they all deserve some careful consideration in light of your total portfolio.

Basic Principles of Alternative Investments

Liquidity. Because most alternative investments are not listed or traded on an organized exchange or immediately convertible to cash, they are generally considered to be illiquid. Obviously, some are more liquid than others, but certain types, such as real estate (including non-public real estate investment trusts or REITS), private equity and private credit, and most works of art typically require more time and effort to be disposed of, should the need arise. And for some the market may be limited by requirements for buyers, required holding periods for certain types of assets, and other special conditions.

Complexity and access to information. Certain alternative investments require specific expertise or knowledge on the part of buyers and sellers in order to engage successfully. This can make it more challenging to properly evaluate both the opportunities and the risks involved. Also, because of the specialized nature of many alternative investments, verifiable price and value information can be more difficult to access, which in turn makes it harder to be certain about the day-to-day value of the asset.

Fees and other costs. Because alternative investments cross so many different categories, differing fee structures can be complex and are often higher, as a percentage of the investment, than those for more traditional assets. Additionally, for certain types of assets such as fine art, stamps, and other artifacts, specialized storage systems may be necessary in order to preserve the item in its best condition.

Barriers to entry. Given the above and other factors, there may be other barriers to entry for those wishing to acquire alternative investments. Buyers may need to meet net worth requirements, certain credentialing, and other mandates. Some types of alternative investments, in fact, are not even available to individual investors, but only to institutional entities.

Why should alternative investments be considered?

Diversification and growth potential. For those with appropriate levels of net worth, experience, and understanding, alternative investments can provide the advantage of diversification from more traditional markets. For example, access to investments in privately held companies can allow investors to participate in a significant source of growth potential that is unavailable to those who are limited to investing in publicly traded equity and debt. Because many alternative investments have a low correlation to more traditional asset types, this diversification can also help to provide a check on volatility.

Passion. For many investor/collectors, the thrill of owning a meaningful object is the principal attraction. While it is true that from a purely financial viewpoint, the item is only worth what another collector is willing to pay for it, for the avid and knowledgeable collector, the joy of ownership may be the best compensation of all.

How much of the portfolio should be in alternative investments?

Recommendations vary by risk tolerance and investor characteristics, but many experts advise that no more than 10–30% of the total portfolio be invested in alternative investments. Of course, there can be exceptions, such as those who routinely buy and sell real estate. Such individuals, who presumably have extensive knowledge of the market in a given area, may feel comfortable with having real estate form a larger percentage of their net worth. But even in these cases, liquidity needs and tolerance for risk should be weighed carefully.

At Aspen Wealth Management, our detailed, individualized attention to each client helps us design personalized investment and financial plans that reflect our clients’ most important needs, goals, and values. Our website has more information about our disciplined, personalized approach to growing and maintaining your wealth.