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Evaluating Regulated and Income Producing Alternative Investments

As defined by Fidelity, an alternative investment is simply an asset that is outside the 'traditional' asset classes of equities, bonds and cash. This may include cryptocurrencies, artwork, collectibles such as cars or NFTs (blockchain art), rare books and jewelry.


The alternative investment industry is expected to grow 53% in 2023 when it is projected to reach $14 trillion in assets under management (Harvard Business School Online. "Online.hbs.edu.")


One of the distinguishing features of alternative investments is their often intricate nature. Unlike traditional assets, alternatives can come with complex structures and terms that may perplex even seasoned investors, potentially leading to uninformed or inappropriate investment decisions. Take, for instance, insurance policies, which often leverage cash value in index funds to generate returns. While these derivative contracts offer diversification benefits, they can also entail high fees and tax implications.


Real estate and mortgages, staples of alternative investing, operate within heavily regulated frameworks in the United States. While real estate assets can be leveraged to enhance investment portfolios, they also expose investors to risks associated with interest rate fluctuations and excessive leverage. Moreover, borrowing money to invest, a strategy known as investing on margin, can amplify gains but also heighten risks, particularly if the borrowed funds are not prudently managed.


Annuities represent another avenue for income-seeking investors within the alternative investment spectrum. Whether opting for fixed or variable annuities depends on one's risk tolerance, as variable annuities are subject to market fluctuations while fixed annuities offer more stable returns. However, both may incur taxes on income distributions and fees, necessitating careful consideration before investing.


Despite their allure, alternative investments typically face fewer regulatory constraints compared to traditional assets, rendering them less liquid and often requiring substantial minimum investments. However, certain alternative vehicles, such as Indexed Universal Life (IUL) policies, offer accessible pathways to long-term income generation based on index returns. IUL policies, in particular, appeal to investors with significant upfront investments seeking tax-advantaged retirement options with guaranteed returns.


It's crucial to note that while many alternative investments operate within a less regulated environment, certain avenues, especially those integrated into insurance policies like IULs, are subject to state and federal oversight, adding an extra layer of protection for investors. For instance, variable annuities are regulated by the SEC, while fixed annuities fall under the purview of state insurance commissioners.


In essence, alternative investments present both opportunities and challenges for investors looking to diversify their portfolios. While they offer the potential for enhanced returns and income generation, navigating this complex landscape requires diligence, understanding, and a keen awareness of regulatory frameworks. By carefully weighing the risks and rewards, investors can benefit from the diversification of  alternative investments to bolster their financial objectives while safeguarding their assets for the future.


© 2024 AD Wilson