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Alternative assets are suited for investors with stable income streams in excess of the alternative asset loss limits.
My highest returns have been from Venture Capital / Angel Investing. Eight figures in returns from a few hundred thousand invested. Once a liquidation event happens, I cut checks to charities and then to my long term retirement accounts which are in boring index funds and a few active managed funds.
I continue to believe that some exposure to real assets, such as gold, is reasonable. I don’t think of it as an investment so much as portfolio insurance and as a way to hedge the dollar-heavy exposure of a portfolio. I would limit the exposure to 10% or less, however.
During my lifetime I have owned farmland, undeveloped land, wine and other tangible investments. I have not owned collectible cars, art work, precious metals or other items that I had a hard time determining a valuation for.
On each of these investments, I always asked myself what was the maximum likely loss that I could have with the investment (Margin of safety). I also read a lot about other people and how they succeeded in their investments. Keep in mind that some assets like wine are taxed at the 28% tax rate for collectibles. There is no long term capital gain tax.
I would say there are rare times when you can buy assets so favorably priced, that in three to five years, you can sometimes get make substantial returns on your investments. One caveat is that each one of these investments takes a little bit of your brainpower to ponder. Keep your life simple and don’t entangle yourself with property you are less than 99% sure of.
A small allocation to alternatives is good. There are so many assets today that were not available before – investing in real estate, art, farmland, crypto, and NFTs is easier than ever. Ok, maybe NFTs are too ‘out there’. But art has proven to provide strong risk-adjusted returns with diversification benefits.
Still, there’s nothing wrong with simplicity. A portfolio of stocks and bonds in low-cost funds within tax-advantaged accounts is solid. Base the mix on your risk tolerance, but know that you might live to 100. I’m 33 – that’s a long way to go.
Also be sure to rebalance. That’s such a benefit of target date funds – they get you diversification and provide automatic rebalancing. Maybe add in extra to small caps, value stocks, and ex-US equities.
Alternatives can be maybe 5-10% of your portfolio, but you don’t want to be a headache that leads to the expense of time and management.
The closest thing to an alternative investment I own is a deferred income annuity. Gold contributes no income to a portfolio, just a bit of inflation ballast. Publicly traded REITs are already reflected in major indices. Partnerships have tax and liquidity headaches. Hedge funds…ha!