Alternative Investments: Are They A Good Choice for Next Generation High Net Worth Investors?

Many next-gen investors are particularly interested in alternative investments. But is it a good idea to add more of them to portfolios? WHZ's Leisl L. Langevin, CFP® CDFA® shares what to consider as you determine what's right for your specific financial goals.

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Transcript

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Welcome to you and your Money. Today's episode features Leisl Langevin, managing Partner advisory at WHZ Strategic Wealth Advisors. So let's talk about our topic today, alternative investments. I think most people have probably heard that term, but might not fully understand what it means. So what exactly are alternative investments? Yeah, so I'll give some stats on why we should be considering this. And we're in the middle of what economists are calling the largest wealth transfer in history. And Cerulli Associates, they do a bunch of different estimates here, and they're thinking over the next two decades we could see about $84 trillion change hands from baby boomers down to the next younger generations. And so we're seeing that shift people are thinking about investing. And of course, we all— investors have more access to information. And so, these type of investments, alternative investments, we're seeing university endowments and even individuals. I mean, you could have anywhere from 10% to 20% of your overall portfolio be invested in alternatives. So, when we say alternative investments, what exactly falls into that category? Yeah, so just at a very simple level, it is those type of investments that fall outside of your typical typical stocks, bonds, and cash. And it's things like, you've maybe heard of private equity, hedge funds, private credit, real estate partnerships. So that's a bigger one, but these are becoming more available to regular investors. So it does offer that additional diversification. So if someone already has stocks and bonds in their portfolio, what role might alternatives play? Well, exactly. And so typically portfolios, they're invested mostly around public stocks and bonds. And what happens is they're influenced more, the typical stocks and bonds by market fluctuations, whereas alternative investments could offer a slightly different approach and they're not, you know, tied so much to market forces and risks that are out there. So it does, again, it might smooth out volatility over time. So it sounds appealing, but I'm guessing there's a reason these investments haven't always been widely available. Yeah, exactly. So sometimes they are, like for example, in some of the real estate partnerships and things like that, you might have to tie up your money for a bit longer, so it becomes a little bit more a little, we call it less liquid, meaning you can't get that money easily if you needed it. So these are longer-term investments. And if you have that longer-term investment horizon, as I mentioned, we've got $84 trillion passing to that next generation. It's possible that that younger generation has more time before they might need that money. Yeah. Again, so again, you mentioned earlier that the investments are attracting attention from the next generation and that's why, right? Because they have time. Yeah, exactly. And especially we've got some high-net-worth millennial and Gen X investors and they're often, I mean, Like I said, information is so available to investors now, so they have different perspectives on investing. They don't want what their parents had, or their grandparents. They want to explore some of these non-traditional opportunities. And with that longer time horizon, it does give them a bit more of an option. So if someone's listening today thinking, "Hey, maybe I should be investing in alternatives," what should they consider first? So yeah, I mean, the first step is always to start with a comprehensive financial plan. You have to determine, are these right for you? We want to consider what are your long-term goals, what time horizon do you have, again, what are liquidity needs, meaning how much cash do you need to have, and then your tolerance for risk. Sometimes you can— in any case, there's always the potential for risk of loss in investments. And so, if you invest this money and then you turn around a few months later, you're like,"Actually, I need that money," that can be a challenge to deal with. So, we want to be sure that we've got the right comprehensive financial plan, and then we can determine, can alternative investments actually play a role in your overall portfolio, can you have have that money tied up and take that potential additional diversification. So again, not necessarily about chasing the latest trends. That's right, that's right. Of course, I mean, they are, they're becoming more of a common investment, and we just want to be sure that they align with your overall goals and circumstances. So it could again provide that additional diversification beyond regular stocks and bonds. They tend to not move in the way that than regular markets do, so it can help in the broader context of your overall financial plan. I'm going to go out on a limb here. I'll bet working with an advisor can really make a difference. It can, yeah. I'm teeing it up for you. Thanks, Gary. That's exactly right. They can be a bit more complex, and you just want to be sure again that your due diligence is done and that you have the right opportunities available to you. But again, they've become more popular. We're focusing on adding them to more of our client portfolio, especially the higher net worth, and they can play that additional role of diversification and additional potential returns. So it's really exciting to see. For more information regarding wealth management and customized financial planning with WHZ Strategic Wealth Advisors, please visit whzwealth.com whz strategic wealth Advisors offer securities and advisory services through Commonwealth Financial Network Member FINRA sipc, a registered investment advisor Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street Pomfret Center Center, CT 06259 and 392AMerrow Road, Toland, CT 06084. They can be reached at 860-928-2341. WHZ Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strives to support clients in achieving their financial life goals while providing absolute confidence and unwavering partnership for life.