Alternative Investments Peak the Imagination, but Carry Significant Risk

Jeff Witz, CFP®

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Investors are often looking for unique investments in an attempt to boost the performance of their portfolios. As the world’s markets evolve and new technologies become essential parts of our lives, investment opportunities arise that tempt investors with the allure of getting in on “the next big thing” and earning quick and substantial returns. However, capitalizing on these types of investments requires an in-depth understanding of the product, the companies involved, and the market in which these companies operate. Substantial research is often needed to increase the probability of investment success, and even then, newly developing markets can come with substantial volatility and risk. Failure to understand the fundamentals driving these markets and the risk involved can lead to significant losses.

Due to the risk involved with newly developing alternative investments, investors must ask themselves how much exposure they are willing to add to their portfolios. Should you put most of your retirement savings into an investment that could just as likely drop significantly as it could rise? Probably not. Are you just trying to have a little fun with a relatively small percentage of your investable assets? That is much easier to stomach. Overall, the decision should come down to your risk appetite and your overall investment objectives.

What are some alternative investments getting a lot of attention recently? (NOTE: This is NOT an endorsement to buy or sell these investments).

  • Marijuana Stocks. Since 2012, when Colorado and Washington legalized marijuana, thirteen other states have passed similar legislation. This has led to a wave of companies in the medical and recreational marijuana space going public with some trading on major stock exchanges. The success of legal marijuana on a state level has resulted in significant discussions of decriminalizing it at the federal level. Investors are attracted to the possibility of rapid expansion of an industry very much in its infancy.
  • Non-Fungible Tokens (NFTs). A more recent phenomena, an NFT is a digital asset that exists on a blockchain. Each NFT has a unique digital signature, meaning it is one of a kind. The tokens act as virtual deeds, conveying ownership of a digital asset. These digital assets can vary widely, but commonly purchased NFTs include images, video clips, gifs, and memes. The free market determines the value of NFTs, so investors can look to purchase an NFT whose value they perceive to be low and can look to sell that NFT in the future for a higher amount. The concept is very similar to buying and selling art, but instead of purchasing a physical piece of art, an investor is purchasing a unique digital token which conveys ownership of the digital asset.
  • Cryptocurrencies. There are currently thousands of cryptocurrencies. The value of each currency is derived by the free market. This creates an investment opportunity to purchase the currency when its value is perceived as low and sell it if the value has increased.
  • Other Alternative Investments- While the previous three alternative investments have been getting the most attention recently, there are other options that investors can explore: private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts.

Alternative investments are not for the faint of heart. Investors need to carefully evaluate these investments before investing. Even more consideration must be given to what percentage of their portfolio an investor is willing to devote to these investment options. While all investing carries risk of loss, a general rule of thumb when investing in alternative investments is not to invest more money than you are willing to lose.

Jeff Witz, CFP® welcomes readers’ questions.  He can be reached at 800-883-8555 or at witz@mediqus.com.

 

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Effective June 21, 2005, newly issued Internal Revenue Service regulations require that certain types of written advice include a disclaimer. To the extent the preceding message contains written advice relating to a Federal tax issue, the written advice is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer, for the purposes of avoiding Federal tax penalties, and was not written to support the promotion or marketing of the transaction or matters discussed herein.

The information contained in this report is for informational purposes only. Any calculations have been made using techniques we consider reliable but are not guaranteed. Please contact your tax advisor to review this information and to consult with them regarding any questions you may have with respect to this communication.

MEDIQUS Asset Advisors, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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