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5 Reasons to have Alternatives in your Portfolio

| July 12, 2017
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  1. Income Potential

Alternative investments, such as a REITs (which stands for Real Estate Investment Trust, and is actually a type of investment business structure approved by the IRS for use) can provide an increase in annual income compared to today’s capital market dividend yielding vehicles, while also providing other benefits such as taxable income off sets through the investments use of depreciation. Since there are many types of alternative income producing Investments, various return yield scenarios and taxable benefits can be implemented based on the investors specific needs. Knowing the needs of the investor and implementing investments to meet those needs should be one of the primary factors in developing and managing a personal financial portfolio into and through retirement.

  1. Growth Potential

As it stands now we are looking at equity markets that have almost doubled in the last 6 years. To continue the growth trend, and maintain a sense of reality towards keeping those returns, it may make sense for some investors to utilize alternative investment vehicles to supplement the overall portfolios growth as the risk associated with the traditional markets continues to increase. Therefore, the use of alternatives, that not only provide income, also may provide growth potential. These types of alternatives focus less on the income and more on the appreciation of the underlying assets. Certain private equity and real estate based alternatives have, over time and given the benefit of proper management, produced yearly returns which have aligned with the returns of the current markets in some cases.

  1. Diversification and Asset Allocation

These terms get so over used, but they are important. The reason is because basic investment management philosophy never wants to over diversify or over allocate a portfolio. Yet it is happening everyday as we blindly seem to accept the increasing use of technology and market growth in our self-limited universe of investments.  Specifically, too much diversification reduces the potential return on the pool of assets you are trying to spread out. Too little, increases the down side risk potential too much, so determining your specific risk tolerance is critical to proper diversification. Investment diversification is a portfolio strategy combining a variety of assets to reduce the overall risk of an investment portfolio. Portfolio risk consists of two types, systematic risk and unsystematic risk. Systematic risk is the risk associated with market returns. Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

  1. Market Correlation Risk Reduction

Alternative Investments do involve a substantial amount of risk, they are illiquid and their distributions are not guaranteed.  These types of investments may not be appropriate for all investors. The reality is that incorporating them into a ones portfolio, if appropriate, retirement or not, may reduce the overall market correlation risk which may translate into improved performance over time. The reason is because stocks, bonds and other assets related to the overall capital markets move in tandem to some degree with each other. Therefore, when you invest in an investment not associated with the markets, and the markets start to go up and down, it may or may not go up and down because it is moving based on its own set of characteristics. This, non-correlation, therefore, reduces the overall portfolio risk due to the reduced overall capital markets portfolio exposure. This has been one of the philosophies behind the Modified Endowment Methodology for over 50 years.

  1. Peace of Mind

There is no better individual factor that relates to why alternatives are important to retirement portfolios than Peace of Mind. No matter your age, knowing what you are invested in and understanding the factors that can affect its success are critical to having Peace of Mind in today's portfolios, especially for retirees. That is why alternatives will continue to be used by investors who wish to understand how they will achieve further financial success and a sound retirement. Today we have too many uncertainties in the capital markets that can, and in my opinion, will eventually effect the overall success of each investors’ portfolio. To add an element to the portfolio that does not follow the herd, and will stand on its own merits is a way to reduce the correlated risk in any portfolio, while still adding income and growth potential. The only question left is when are you going to get started in finding out which alternatives are right for you!




Securities and Advisory Service offered through Centaurus Financial, Inc., member FINRA and SIPC, a Registered Investment Advisor. Centaurus Financial, Inc. and LCORE Wealth Management, LLC are not affiliated.


This article has been provided solely for information and educational purposes only.  Any investment concepts or ideas noted herein are not and should not be construed as an offer to buy, sell or hold any securities which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined.  Alternative investments, such as REITs, involve a substantial amount of risk including the possible loss of your initial invested amount and may not be suitable for all investors.  Alternative investments are illiquid, they are not traded on a stock exchange and their distributions are not guaranteed.  Information relating to securities is intended for use by individuals residing in the United States of America, in various states.  Please call to verify if we are registered in your state.

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