Broker Check

Alternative Investments: Is Real Estate Back?

June 04, 2024

Q: What are alternative investments?
A: Alternative investments are non-traditional assets that include real estate, private equity, venture capital, hedge funds, liquid alternatives, commodities, and managed futures. These investments go beyond the typical stocks and bonds, offering a more diversified investment toolkit.

Q: Why consider alternatives over traditional stocks and bonds?
A: While stocks and bonds are great for liquidity and are fundamental to many portfolios, the long-term forecasted returns for these assets are relatively low. Alternatives can potentially provide higher returns and reduced risk through diversification, making them a valuable addition to your investment strategy.

Q: What are the forecasted returns for stocks and bonds?
A: According to various investment houses like JP Morgan and Vanguard, the forecasted annualized returns for U.S. equities over the next decade range from 4% to 7%. For bonds, the forecasted returns range from 4% to 5.8%. With current inflation around 3% to 3.5%, the real returns from these traditional assets are quite low.

Q: How do alternative investments reduce risk and increase returns?
A: Alternative investments can shift the risk-return profile of a portfolio. By incorporating alternatives, you can achieve higher returns for the same level of risk or lower risk for the same level of return. Typically, having 5% to 20% of your portfolio in alternatives can enhance your overall investment performance.

Q: What specific types of alternative investments are there?
1. **Private Equity:** Investing in non-publicly traded companies.
2. **Venture Capital:** Investing in early-stage companies with high growth potential.
3. **Private Debt:** Lending to private companies.
4. **Hedge Funds:** Using various strategies to maximize returns, including shorting stocks and using options.
5. **Real Estate Funds:** Investing in real estate through REITs or direct property investments.

Q: What are the key considerations when investing in alternatives?
A: It's essential to understand the liquidity of these investments, as they are often less liquid than traditional stocks and bonds. Manager selection is crucial because the performance can vary significantly between top and bottom quartile managers, especially in non-core real estate, venture capital, and hedge funds.

Q: How does real estate as an alternative investment work?
A: Real estate investments can generate returns through income (rents) and capital appreciation. The returns from real estate investments have traditionally come from income, but the recent interest rate environment has shifted this dynamic. Real estate investments can also move independently of the broader market, offering diversification benefits.

Q: What are the benefits of adding real estate to your portfolio?
A: Adding real estate can reduce portfolio volatility and provide steady income. Direct real estate investments often have a negative correlation with the stock market, meaning they can perform well when the market is down, adding stability to your investment portfolio.

Incorporating alternative investments into your portfolio can provide diversification, reduce risk, and potentially increase returns. Understanding the different types of alternatives and their unique benefits is essential for making informed investment decisions. By expanding beyond traditional stocks and bonds, you can build a more resilient and robust investment strategy.

Feel free to reach out to us if you'd like to discuss more. 

Watch our Webinar on Alternative Investments HERE