Alternative investments aren’t for everyone – especially investments in private companies. Although potentially rewarding, private investments can also carry significant risk. Elite investors understand this, but they also understand that these risks can be mitigated significantly in the right assets and in the right hands – potentially offering higher returns than public options but at lower less risk.
Investing in the right alternative opportunity will require due diligence to ensure the company’s investment objectives align with your investing philosophies and goals.
So, should you be investing in alternatives? Ask yourself these five questions to determine the suitability of alternative investments in your portfolio:
Do You Qualify?
This is an objective question. Either you qualify to invest in private investments, or you don’t. When I say alternative investments aren’t for everyone, I’m not just referring to the mentality it takes to invest in alternatives but also the regulatory requirements the SEC has instituted to limit private investments to an exclusive group of investors.
While everyone can invest in public investments, not everyone can invest in private investments. Do you fall within this exclusive group?
Except for securities offered through Crowdfunding offerings, virtually all alternative investments offered in the private markets are offered Regulation D private placements limited to “Accredited Investors.”
For individuals, you qualify as an Accredited Investor if you:
- Have a net worth exceeding $1 million individually or combined with a spouse (excluding the primary residence value).
- Have earned income exceeding $200,000 ($300,000 if combined with a spouse) during each of the last two calendar years, with the reasonable expectation of maintaining these income thresholds during the current year.
Do You Tolerate Risk?
Nobody wants to lose money, but do you have the risk tolerance for losing part or all of your investment potentially? This question is important because investors with low-risk tolerances tend not to deal with setbacks and adversity well.
Because many private investments are startups and encounter common hiccups common with all new companies, these investments are not appropriate for the weak of heart. Having the right personality is vital for investing in alternatives.
Do You Value Liquidity?
If you value liquidity, then alternative investments are not right for you. Unlike public investments that are traded freely, private investments are not liquid.
Private equity and private investments in tangible assets require long lock-up periods to let the investment fully mature and maximize returns. If you value the convenience of ducking in and out of investments at will, private alternatives are not for you.
Do You Value Diversification?
To take full advantage of alternative investments, diversification is key. If you’re used to putting all your eggs in one basket because you don’t want to deal with the headaches of vetting multiple deals, then private alternatives are not for you.
Private alternatives are inherently high risk, but the risk can be mitigated across multiple asset segments, geographic locations, and operators with the right diversification strategy.
Are You a Speculator?
If you have a short attention span and are constantly looking to hit a homerun, private alternatives may not be right for you. Private alternatives are typically in traditional industries rooted in tangible assets.
Many would consider these industries boring, but they offer reliability and consistency that speculative investments don’t.
Elite investors have long included private alternatives in their portfolios – historically allocating more than 50% of their assets to this class in the form of private equity and private real estate.
These alternatives are not for everyone – requiring patience, a long-term perspective, and a high-risk tolerance – but with the right mindset and the right diversification strategy, they can be highly rewarding.