The key distinction between traditional and alternative investments lies in their inherent purpose within investment portfolios. Traditional assets—like stocks, bonds, and cash—are often favored for their familiarity and history of steady returns. In contrast, alternative assets, which encompass a broader range of options—such as real estate, commodities, and life settlements—are frequently sought out for their fast returns and high payoffs. Alternative investments also have the potential to provide stability and diversification, especially during uncertain economic times.
In light of recent discussions about the U.S. economy‘s future and potential recession predictions for 2023, the talk surrounding alternative investments vs. traditional investments becomes even more critical. Forbes suggests a possible “soft landing” with managed inflation and continued growth, despite the New York Fed estimating a 66% chance of a U.S. recession in the coming year. Given this backdrop, the appeal of alternative investments is evident, presenting opportunities for investors to potentially mitigate risks in unpredictable times.
That said, investors should approach any investment with caution, ensuring they understand the pros and cons of both asset classes. This blog will delve deeper into the intricacies of alternative and traditional investments, providing educational information for your consideration.
What Are Traditional Assets?
When thinking about investments, stocks, bonds, and cash usually come to the forefront. These mainstays of the investment world are what we term as “traditional assets.” But what are these three traditional asset classes, exactly, and how do they function?
- Stocks (Equities): These represent ownership in a company. When you buy a share of a company, you own a piece of it and have a claim on its future earnings. The value of stocks is subject to the volatile swings of the stock market, which can imperil the return on your investment.
- Bonds: When you buy a bond, you‘re lending money to an entity (like a government or corporation). In return, you‘re promised regular interest payments and the return of the bond‘s face value when it matures.
- Cash or Cash Equivalents: This includes money market funds, treasury bills, and other short-term, liquid investments. They are considered safe and can be easily converted to cash, although it’s important to note that these assets are also subject to the whims of the market.
These traditional assets form the backbone of many investment portfolios. They are well-understood, highly regulated, and have been around for centuries. According to research by Lori Calvasina, an RBC Capital Markets strategist, the S&P 500 has historically seen drops ranging from 14% to 57% during recessions since 1937. On average, the S&P 500 has experienced a decline of 32% during these periods. Such data is a stark reminder of the potential risks involved, making investors think twice about their asset allocation.
To fortify your portfolio against such volatility, exploring alternative investments might be a smart move. It’s important to note that alternative investments, like all investments, carry some degree of risk. Alternative investments, similar to stocks, bonds, mutual funds, and exchange-traded funds, can lose value—even their entire value—if market conditions sour. You should carefully consider the risks of any investment prior to investing.
What Are Alternative Assets?
Alternative assets are investments that diverge from the traditional categories of stocks, bonds, or cash. While these assets span a vast range—including real estate, precious metals, private equity, and even art—each offers unique features and benefits.
What is an example of an alternative asset? Consider life settlements. In situations where seniors find their life insurance policies unnecessary or too expensive, they aren‘t limited to merely surrendering them for a minimal return. They can instead opt to sell them for a higher lump sum to an investor through a life settlement. From an investor‘s perspective, this entails acquiring another person‘s life insurance policy. In this exchange, the investor offers the senior an upfront payment, takes on the ongoing premium obligations, and in time, reaps the death benefit. Notably, such investments are not as correlated with the stock market‘s fluctuations as traditional investments are, presenting a potentially steadying influence amid economic upheaval.
Life settlement investments are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional who is well versed in this field to determine if life settlements are a viable option for you.
Other well-known alternative assets include:
- Real Estate: Buying property can diversify your portfolio and potentially earn rental income or benefits from property appreciation. Real estate asset classes include residential, commercial, industrial, and raw land properties.
- Commodities: Investing in physical goods, such as gold or oil, can potentially mitigate inflation and market volatility.
- Hedge Funds: These are pooled investment funds that aim to achieve high returns using various strategies.
- Private Debt: This refers to lending money to private companies. Unlike bonds which are traded on public markets, private debt is negotiated directly with the borrower and can offer higher yields to compensate for its illiquidity.
- Collectibles: These items, such as vintage cars, rare stamps, or fine wines may appreciate in value over time, and are often independent of traditional market forces.
- Crowdfunding Investments: Modern platforms allow investors to pool small amounts of money to fund startups or projects, offering a potential for return if the initiative succeeds.
Venture into Non-Traditional Asset Classes With Life Settlement Advisors
For investors looking for steady growth, especially during potential recessions, exploring alternative investments may be worthwhile. Life settlements are one such option that can potentially provide a buffer against market turbulence. As with all investments, it‘s crucial to do your homework and understand the associated risks.
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.
If you‘re intrigued by the prospect of investing in life settlements, or you‘re a policyholder considering this route, organizations like i2 Advisors offer valuable resources and assistance to help you make informed decisions.
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.