It’s impossible to escape headlines like “Recession vs. Slowdown: Economic Forecasts Cloudy for the Rest of 2023” or “US Recession Likely Coming in 4Q.” Everywhere you look, it seems like there are increasingly grim outlooks for our financial future. At Life Settlement Advisors, we’re here to give you some good news: despite economic turmoil, you can make wise investment decisions that can give you peace of mind and protect your financial security.
We’ve put together this guide to help you compare traditional and alternative investments and understand the options that you have available to you. As always, it’s best to consult with your financial advisor to make sure that you’re making the appropriate decisions for yourself. Let’s take a look at frequently asked questions about investments and learn more about how (and why) you can diversify your investment portfolio.
What Is a Traditional Investment?
A traditional investment is the concept of putting your money into a type of asset that is well-known, like stocks or bonds. These types of investments typically are liquid assets and are expected to return capital appreciation, dividends, and/or interest.
What Is an Example of a Traditional Investment?
An excellent example of a traditional investment is a mutual fund. These are funds that pool money from many different investors. Managed by a professional, this money is then invested into the stock market through the professional’s expertise. This type of investment varies in risk, depending on the types of investments the manager makes. A major benefit of mutual funds is that they are typically easy to buy, as well as being relatively simple to understand. However, keep in mind that you’ll have to pay capital gains taxes whenever you receive distributions, and there may be fees or sales charges.
What Is an Alternative Investment?
Alternative investments are any type of investment that differs from the traditional categories like stocks, bonds, cash, and mutual funds. Most financial advisors view alternative investments as supplemental to traditional ones, rather than replacements. Other key differences include:
- Liquidity | Alternative investments tend to be less liquid than traditional ones, meaning investors may be unable to trade the alternative investments and will hold them for an unspecified period of time.
- Trading | Alternative investments are typically available for both public and private trading, while traditional investments are solely traded within public markets.
- Valuation | The value of traditional investments are typically readily ascertainable, while alternative investments may not be. The value of some alternative assets are vulnerable to subjectivity.
- Shareholders | Alternative investment shareholders may take a more active role when compared to traditional investments’ more passive investors.
- Transparency and Regulation | While traditional investments are heavily regulated, alternative investments are not typically viewed with the same amount of scrutiny as traditional investments.
- Performance and Returns | Alternative investments are not as correlated with traditional investments and therefore changes in global market movements and conditions may impact alternative investments in a different manner.
What Are 4 Categories of Alternative Investments?
Four categories of alternative investments are hedge funds, private capital, natural resources, and real estate and infrastructure. Let’s take a closer look at each of these categories.
- Hedge Funds | There are many different types of investment funds, and hedge funds are one of the most popular options for alternative investments. These funds are similar to mutual funds, but rather than investing in traditional options like stocks or bonds, the pooled money is invested by the manager into alternative investments. Hedge funds are typically considered as a “high risk, high reward” type of investment.
- Private Capital | This term can cover several different types of alternative investment strategies, including private equity, venture capital, and private debt.
- Private equity involves purchasing ownership in a mature business. Once purchased, the private equity manager strives to grow the value of the business before exiting the investment. At the end of the cycle, the business’ holdings will be sold off or taken public and profits will be paid out to the investors if this strategy has been successful.
- Venture capital is similar to private equity, but rather than investing in mature businesses, money is invested into early-stage companies. These companies are often in the tech industry, and this type of investment is higher-risk as the businesses are new and haven’t proven their success. However, there is the potential for high returns if the company is successful.
- Private debt involves making loans to businesses that are in need of cash flow. Returns come from interest payments, as well as repayment of the original amount borrowed. Private debt is generally seen as less risky than private equity or venture capital investment strategies, as companies don’t have to be purchased or go public to repay the loan.
- Real Estate and Infrastructure | These types of alternative investments can fall under the broader category of private capital; however, they both include investment into physical assets. Real estate investments involve putting money into properties, operating and improving them, and then selling them for a return. Infrastructure investments involve putting money into building projects like roads, bridges, or energy infrastructure. These investments typically involve bonds, and returns are generated from the interest on them.
- Natural Resources and Commodities | Gold or oil are examples of this type of alternative asset class. Typically, investors put money into funds that specialize in this type of asset, purchase stocks in companies, or simply purchase the commodity to resell at a later date once the price has risen.
What Is an Example of an Alternative Investment?
In addition to the alternative investments examples listed above, another alternative investment strategy is a life settlement. Through a life settlement broker like Life Settlement Advisors, a policyholder can sell their unwanted life insurance policy to an investor. Once purchased, the investor pays the premiums and eventually collects the death benefit on the policy. While there are risks with all alternative investments (and really, with any type of investment), life settlements can provide an extremely predictable return as the policy’s death benefit will not change. Life settlements can be an excellent way to add diversity to your investment portfolio (or, a potential one-time payout for you if you qualify and have an unwanted or unneeded policy). Life settlements are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional that is well versed in the field to determine if life settlements are a viable option for you.
What Is an Alternative Asset?
In general, an asset is considered an item of value that you own. As an investor, an alternative asset is an item of value that you expect to grow in value over time and is not traded on public markets. The alternative investments listed above include alternative assets, like real estate or commodities.
What Is an Example of an Alternative Asset?
There are many alternative assets examples like cryptocurrency. One easy-to-understand example of an alternative asset is investing in collectibles. For example, if you have an affinity for fine art and have access to art experts or have studied art yourself, purchasing artwork and building an art collection could be a wise alternative investment strategy. You can monitor the art world, purchasing and selling artwork at ideal times for high returns, as well as enjoying the art while it is in your possession. Art is just one of the many different types of collectibles available. You may find yourself drawn to vintage cars or coin collecting—investors find the most satisfaction and oftentimes the most success when they invest in collectibles that they are knowledgeable about so that they can make wise financial decisions.
What Are the Fastest Growing Alternative Investments?
Research by Preqin—a provider of data, analytics, and insights to the alternative assets
community—predicts that private equity and private debt will be the fastest growing alternative investments by the end of 2025. Private equity is expected to account for approximately half of the total alternative investment industry. Other assets are expected to expand in size during this time period, although at a slightly slower pace.
Are Alternative Investments a Good Idea?
Including alternative investments as a strategy can be an excellent idea for the reasons stated above, depending on your goals and your risk tolerance. When looking at alternative investments vs. traditional investments, the most important thing to keep in mind is portfolio diversification. When choosing investment alternatives, why is it wise to diversify? The answer is simple: diversification increases returns while decreasing risk. It’s also important to keep in mind that you probably won’t be replacing traditional investments with alternative ones, but rather adding in order to create this diversification. After all, there are certainly advantages and disadvantages of alternative investments, so including a wide range of investments may help mitigate risks while maximizing returns.
Remember those headlines about economic uncertainty? Well, research has shown that one of the best ways to futureproof your investments during times of economic instability is to add diversity to your portfolio. This is due in part to the fact that each asset class and type of investment performs differently based on its unique variables. The goal of this strategy is to help minimize overall portfolio losses during a recession. As always, it’s important to consult your financial advisor for advice whenever you are considering any investment moves to assess whether such investments are suitable for you based on your investment goals, risk tolerance, and financial situation.
Life Settlements: An Alternative Investment Option for 2023 and Beyond
If you’re interested in diversifying your portfolio with alternative investments but aren’t sure where to start, you may want to consider life settlements. Here at i2 Advisors, we have years of experience as a life settlement broker and facilitating this type of investment. Reach out today to learn more about this alternative investment option and see how you can add diversification to your portfolio for peace of mind during economic turmoil.
THIS MATERIAL IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. OTHER THAN LIFE SETTLEMENTS, I2 ADVISORS DOES NOT PROVIDE THE SERVICES DESCRIBED IN THESE EDUCATIONAL MATERIALS NOR DOES IT RECOMMEND ANYONE TO INVEST IN THE ASSETS DESCRIBED THEREIN. ALL INVESTMENTS CARRY RISK AND INDIVIDUALS SHOULD CONSULT WITH THEIR FINANCIAL PROFESSIONALS BEFORE UNDERTAKING ANY TYPE OF INVESTMENT. THIS INFORMATION DOES NOT CONSTITUTE INVESTMENT ADVICE AND SHOULD NOT BE CONSTRUED AS A SOLICITATION OR OFFERING OF ANY INVESTMENTS DESCRIBED THEREIN.