One of the biggest dilemmas facing investors today is where to find yield. Many investors have 40% to 50% or more in fixed income investments that are not yielding anywhere close to historically normal levels. Investors in bond mutual funds are at greatest risk these days since even a small increase in interest rates could mean big losses in the “safe” part of their portfolio. What is an investor to do in order to maintain a reasonable rate of return in the portion of their portfolio not invested in the stock market?
The Federal Reserve’s attempt at stimulating the economy has had some very negative and unwelcome consequences for investors. In driving down interest rates to near zero, the Fed has punished savers and retirees and left them with few choices on where to invest their hard-earned dollars. Those who rely on income from bonds, CDs, fixed annuities, and money markets have been left wondering what alternatives are available. While no one wants a return to early 1980’s interest rates, many retirees wouldn’t mind a return to more normal rates.
Alternative investments have become more popular recently as investors search for greater rates of return and diversification from the stock market and bonds. Real estate investment trusts (REITs), oil and gas limited partnerships, business development corporations (BDCs) and direct participation programs (DPPs) are just a few of the investments that have become a more prominent part of investor portfolios over the last seven years. The question is which of these investments is appropriate for whom and how much of your portfolio to allocate to any or all of these programs. This can be a daunting task for most as these are complex investments with many nuances and fine print. A great deal of due diligence must be done to determine which, if any, of these programs is right for you.
In determining whether or not alternative investments are appropriate for your portfolio it is necessary to take into account several factors. Risk tolerance, time horizon, income needs, tax bracket, and net worth are just a few of the factors needing careful consideration when determining whether or not alternative investments are a good fit. REITS have become very popular recently as many offer attractive rates of return and fixed pricing on the invested principle. However, not all REITs are created equal. The same can be said for any of the programs mentioned. If 80% of the mutual funds in today’s investment world fail to keep up with the index to which they correlate, it might be safe to assume the same of alternative investments.
The wisest way for any investor to proceed is to consult a trusted and seasoned financial planner who has a good track record and a solid reputation for helping his or her clients accomplish their goals. A financial advisor who is impartial, independent, fee based, and is not employed by a company looking to sell you their suite of products and services is vital to helping you navigate through these difficult and unchartered waters and achieving a positive outcome.
Editor’s note: This month USAWOA welcomes Radvanyi Wealth Management as USAWOA’s newest corporate partner. Mr. Radvanyi was previously a loyal traditional corporate sponsor. For the past five years, he has also managed USAWOA’s Lifetime Membership investment portfolio. Between his advice and the continued support of new USAWOA Lifetime Members, the value of the portfolio has grown in value by well more than 100%.