When building a diversified investment portfolio, most people think of traditional assets like stocks and bonds. However, there’s a growing recognition that alternative investments can play a crucial role in achieving long-term growth with the potential for improved stability.
Relying on the traditional “60/40” mix of stocks and bonds might not be enough to realize today’s long-term investment goals. With market conditions constantly shifting, alternative investments offer an opportunity to reduce volatility, boost returns, and add another layer of diversification to your portfolio.
While these investments come with unique risks, they also offer opportunities that can complement traditional stock and bond investments, potentially helping to reduce volatility and enhance overall returns.
This blog will explore alternative investments, who can access them, and how they can be used in a diversified portfolio. We’ll also explore how Beck Capital Management, an established Austin wealth management firm, incorporates alternative investments to meet the unique needs of our clients.
Accredited Investor Guidelines: Who Can Invest in Alternatives?
Unlike traditional stocks and bonds, alternative investments often require investors to meet specific financial qualifications. This is because many alternative investments are not subject to the same regulatory oversight as traditional investments, making them riskier for the average investor.
You must be an accredited investor to use several alternative investment asset classes. These guidelines ensure that you have the financial capacity to absorb potential losses if you invest in higher-risk alternative investments:
- You must have earned an annual income of at least $200,000 (or $300,000 combined with a spouse) for the past two years while expecting the same income level in the current year.
- Alternatively, you can qualify if you have a liquid net worth of over $1 million, excluding the value of your primary residence.
- Certain business entities and trusts can also qualify as accredited investors if they have total assets exceeding $5 million or are composed entirely of accredited investors.
If you meet these criteria, working with Austin investment advisors can help you explore the full range of available alternatives.
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Types of Alternative Investments
There are several types of alternative investments, each offering different opportunities and risks. Think of them as “alternatives” to common stocks and government or corporate bonds. Here are a few of the more common ones:
- Private Real Estate
Pros: Private real estate investments, whether in commercial properties, residential properties, land, or REITs (Real Estate Investment Trusts), can offer the potential for steady income and long-term appreciation. Real estate can also act as a basic hedge against inflation.
Cons: Private real estate investments are usually illiquid, meaning selling a property and accessing your capital may take time (weeks, months, or years). Additionally, broader economic conditions can impact real estate values, and managing properties can come with significant costs and responsibilities.
- Private Credit
Pros: Private credit involves lending directly to companies or individuals outside the public markets. These loans can offer attractive interest rates, especially in a low-yield environment. Since private credit is less correlated with traditional markets, it can help diversify a portfolio and reduce overall volatility.
Cons: As with any loan, there’s always the risk that the borrower will default. Private credit investments are also less liquid than public bonds, meaning you may have to hold the investment longer than desired.
- Private Equity
Pros: Private equity involves investing in privately held companies, often through venture capital or buyout funds. These investments can offer significant growth potential, especially since roughly 86% of companies with $250 million or more in annual revenue are privately held. This represents a huge segment of the market that public equity investors can’t access.
Cons: Private equity investments are often long-term and can take years to fully realize returns. They also come with higher risk, as not all companies will succeed. Additionally, private equity funds often require substantial minimum investments, limiting accessibility for smaller investors.
- Structured Notes
Pros: Structured notes are financial instruments that combine traditional investments like bonds with derivatives. They offer the potential for higher returns and can be customized to meet specific risk/reward profiles. The notes can also provide downside protection depending on how they’re structured.
Cons: These investments are complex and sometimes difficult to understand, even if you are a more experienced investor. They also carry modest credit risk, as their performance is tied to the issuer’s financial strength. Additionally, structured notes can be more difficult to sell before maturity, compared to public debt, which somewhat limits their liquidity.
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Why Consider Alternatives? Attractive Returns and Lower Volatility
One key reason to consider alternative investments is the potential for attractive returns at relatively modest levels of risk. Alternatives typically have a low correlation to traditional assets like stocks and bonds, meaning that when the stock market experiences volatility, alternatives may remain stable or even appreciate.
This can help manage overall portfolio risk and provide more consistent returns over time.
For example, private credit may continue to generate income even in a downturn, while real estate might appreciate steadily, even when inflation is higher and stocks are more volatile. This level of diversification is essential for a well-rounded portfolio, particularly for investors seeking to preserve their wealth during uncertain economic times.
The Growing Importance of Private Markets
As mentioned earlier, a significant portion of American business is privately held. About 86% of companies with $250 million or more in annual revenue are private, making these markets a significant component of the U.S. economy. These companies often have unique business models and growth opportunities that are not available in the public markets, making them an attractive option if you are seeking higher returns. Plus, there may be an increased opportunity for acquisitions.
By including private equity in your portfolio, you gain exposure to this largely hidden segment of the economy.
Accessing Alternative Investments
While alternatives offer many benefits, accessing them can be challenging. These investments require significant due diligence, legal work, and financial expertise to evaluate their current condition and future potential. This is where working with a wealth management firm in Austin like Beck Capital Management becomes essential.
At Beck Capital Management, we provide in-house portfolio management and include a variety of alternative investments in our client portfolios based on their specific needs, risk tolerances, and goals. Whether you’re looking to diversify your portfolio, hedge against risk, or explore higher-growth opportunities, our Austin investment advisors have the expertise to guide you through the process. With our knowledge of the private markets, we can also help you invest in alternatives that align with your risk tolerance and financial objectives.
How Does Beck Capital Management Use Alternative Investments?
At Beck Capital Management, we recognize that each client’s needs and goals are unique. That’s why we tailor investment strategies that may include alternatives like real estate, private equity, and structured notes, depending on your objectives and financial risk profile.
Our portfolio managers in Austin take a proactive approach, constantly analyzing market conditions and opportunities to help ensure our clients are positioned for success.
By working with our team, you can access a broader range of investments that might otherwise be out of reach. We’re committed to helping our clients diversify their portfolios while managing risk, all through our private client portfolio management process.
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