Frequently Asked Questions

In the US, far and away the three most common portfolio components are stocks, bonds and CDs. So essentially anything which is not one of these three is an Alternative. When the term first started being used it applied primarily to investments in real estate, hedge funds or private equity. But in time the definition has expanded to include a lot of other things.

Not inherently. It’s just that stocks are a better fit for some types of investors than they are for others. Retirees in particular have a couple of good reasons to look elsewhere. First is the fact that the market has pretty significant downturns from time to time, and if you have to take money out during such a period the losses become permanent. Second is a more philosophical concern, but one which is equally important: if you have what you need to live on in the first place, why expose it to a lot of investments risk – of any kind – in the first place?

Depends on what you need the investment to do. If you need a monthly check and low risk, buying a futures contract with a delivery date three years out isn’t going to accomplish what you need. Too often investors lose sight of the fact that investments are a means to an end, not the end themselves. People who buy drill bits don’t want drill bits: they want holes. Investors are typically looking for a financial result of some type. So the best investment, for them, is going to be the thing(s) which comes the closest to getting them to the goal they are trying to reach. Making sense of investments is much easier if you start looking at them as the tools.

Well, that’s a good question. Not sure of the answer. Develop some goals, and we won’t have to worry about it. Having a sense of what you need to do is much harder when you haven’t defined what you are trying to accomplish. Which sounds preachy when you put it like that. But kidding aside, goal setting is a part of the investment process which is critical to positive results over time, and it’s the stage of the process that investors frequently forget to do. So it’s worth mentioning explicitly.

Brokers can only sell what their company has approved. Since brokers are salesmen, most will not spend time talking about things they can’t deliver. In fact, for liability reasons, most broker/dealers don’t want their brokers even talking about things they can’t sell. The kinds of investments which get approved are those which can be sold on a broad basis, like a mutual fund. The process of vetting an investment is expensive for the B/D, so if they can’t sell a lot of it, they can’t take the time to approve it. As such, one-off deals (such as you typically find in real estate) never make it onto the list. They might have some sort of fund or REIT offering for real estate exposure. But not the kinds of individual deals that lead to direct ownership (and hopefully higher returns).

Fund performance is impacted by at least three things which can put drag on the results. First, it is difficult to have full deployment of the capital at all times. So if 90% of the capital is deployed, then the yield on those assets has to be allocated to the full 100% of the fund’s balance. Second, the fund will have expenses that would not exist if there wasn’t a fund. So investment results are partly spent for things like legal and accounting expenses that an individual would not have if they held a deal outright. Finally, funds have managers. You probably don’t work for free; neither do they. Now, the fund model has some benefits too. But as with most things in life, those benefits don’t come without costs.

Typically, yes. The main caveat is going to be whether or not the company that you currently have your account with allows such investments. For administrative reasons, fund companies and banks often limit what you can invest in. For the full range of legal investment options (and there are a whole lot of them) you will probably need to open what’s called a self-direct IRA. Just google that term and you’ll find a whole host of custodians who are in that business. Transferring the account is usually pretty easy, and a minimal thing to have to do to get access to a wider range of investing options. This is especially true if what you have right now has you exposed to more risk than you are comfortable with, or if your current holdings are not accomplishing what you need them to accomplish.