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With consumer interest in alternative investments on the rise, financial advisors say it’s important to find the right way to invest.
Alternative investments are a broad category that covers many assets outside of traditional cash, stock, and bond holdings. Alternatives include private market assets, real estate, commodities such as gold and oil, and cryptocurrencies.
Advisers say investing in these products can involve additional risks and complexities. One smart way to gain exposure to them is through a more traditional vehicle: exchange-traded funds.
This strategy represents a crossroads of investor interest. State Street Investment Management said earlier this month that investors have invested more than $1 trillion in U.S.-based ETFs so far this year and are on track to set a new annual record. Other analysts recently told CNBC that much of that inflow is going to gold and crypto ETFs.
Young people in particular have expressed disillusionment with traditional asset holdings, a phenomenon experts have dubbed “financial nihilism.”
Two-thirds of Americans surveyed said investing success requires complementing traditional assets, according to a new study from Charles Schwab & Co. Almost half of respondents, 45%, said they were interested in owning alternatives such as private equity, real estate partnerships and hedge funds.
Schwab’s survey was conducted this spring and surveyed 2,400 people, including a sample of 2,000 adults, 200 Gen Z respondents, and 200 crypto investors.
Regulatory changes may also allow more people to access a range of alternative assets.
President Donald Trump signed an executive order in August aimed at making it easier to introduce alternative products to workplace retirement plans. Meanwhile, the U.S. Securities and Exchange Commission recently made changes that could speed up the launch of spot crypto ETFs.
“Boring investing still works.”
Cathy Curtis, founder and CEO of Curtis Financial Planning in Oakland, Calif., said using ETFs to gain exposure to alternatives could avoid some of the complexities of investing directly in such assets — the lack of liquidity.
“These (private) investments often have multi-year lock-up periods, limited maturity dates, or rely on underlying funds that liquidate their holdings before investors receive payouts,” said Curtis, a member of CNBC’s Financial Advisor Council.
However, ETFs that hold these illiquid assets are typically free to trade throughout the day and for extended periods of time.
Curtis recommends limiting alternative investments to 10-15% if you have a large portfolio and less than 5% if you have a small nest egg.
Andy Reid, director of behavioral economics research at Vanguard, said people who are investing to buy a home, send their kids to college or someday retire may still find it better to invest the bulk of their portfolio in traditional stocks and bonds.
“There’s always noise in the investment environment, and chasing trends and the latest headlines can have a negative impact on an investor’s portfolio in the short and long term,” Reid said.
History has shown that putting money into a broad basket of stocks can be very profitable in the long run. According to Morningstar Direct, if you invested just $1,000 in the S&P 500 on February 1, 1970, you would have owned more than $379,000 as of October 20. A $1,000 investment in the index on January 1, 2020 will be worth more than $2,200 on October 20th.
“Boring investing still works,” Curtis said.
