Savvy Tips on Alternative Investments From a Wealth Adviser

101 3 minutes read

In recent years, alternative investments have captured the attention of high-net-worth investors — especially those nearing retirement or seeking new ways to diversify.

Private equity, hedge funds, real estate, annuities and commodities are now common topics in investment conversations, largely because of their potential for higher returns and portfolio resilience during market volatility.

But before stepping into these complex, often illiquid strategies, it’s critical to understand what they are — and how to approach them strategically.

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Used thoughtfully, alternatives can enhance a portfolio. Used carelessly, they can become expensive mistakes.*

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Why the surge in interest — and caution?

Access to alternatives is expanding. What was once exclusive to institutional investors and the ultra-wealthy is now more accessible through structured products and online platforms.

Some private equity firms are even exploring ways to add private market exposure to 401(k) plans.

But with greater access comes a need for caution.

Many of these investments remain limited to accredited investors — those with a net worth over $1 million (excluding primary residence) or annual income above $200,000 ($300,000 if married filing jointly).

And because alternatives often require long holding periods, they’re not ideal for investors who might need liquidity soon.

Savvy tips before you invest in alternatives

Know your time horizon. Many alternatives tie up your money for five to 10 years. Don’t invest funds you might need soon.

Understand the fees. Alternatives often involve management fees, performance fees and surrender charges. Know exactly what you’re paying.

Do your homework. Use resources like FINRA’s Fund Analyzer and Investor.gov to research investments and verify credentials.

Beware of complexity. If you don’t fully understand how an investment works or what drives its returns, take a pause. Complexity isn’t always better.

Check eligibility. Confirm whether you qualify as an accredited investor before pursuing certain opportunities.

Ask about liquidity. Understand when — and how — you can access your money. Some investments restrict access for years.

Start small. Consider a modest initial allocation before making alternatives a larger part of your portfolio.

A hypothetical example: Stability amid market volatility

One investor, a 60-year-old business owner preparing for retirement, wanted to stabilize her portfolio in the face of rising inflation. She already had a foundation of index funds and bonds but was concerned about bond underperformance and stock market swings.

The solution: Allocating a portion of her assets to a private real estate income fund. Over the past three years, that investment delivered a consistent 7% annual return** — even as bond values dipped and equity markets turned volatile.

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This isn’t to suggest alternatives are risk-free. But when integrated thoughtfully, they can provide welcome stability and returns.

Examples of alternative investments to consider

Alternative investments fall outside traditional stocks, bonds and cash.

Common examples include:

Private equity. Ownership in private companies, typically involving long lock-up periods and the potential for significant growth.

Hedge funds. Actively managed pooled funds using advanced strategies, often including leverage and short-selling.

Real estate. Direct property ownership or investments through real estate investment trusts (REITs) and private real estate funds.

Annuities and insurance products. Insurance-based vehicles like indexed universal life insurance (IUL) policies and variable annuities, blending income and market exposure.

Venture capital. High-risk, high-reward investments in early-stage startups.

Commodities. Physical goods such as gold, oil, and agricultural products, typically accessed via ETFs or futures contracts.

These assets can help reduce overall portfolio risk thanks to their low correlation with public markets. But that diversification comes with trade-offs: higher fees, limited liquidity and greater complexity.

The bottom line

Alternative investments are no longer reserved for institutions or the ultra-wealthy. With access expanding, informed investors can tap into this space to diversify, hedge against volatility and potentially enhance returns.

But alternatives require patience and a clear understanding of the risks.

In today’s unpredictable markets, they can offer a valuable edge — but only if you fully understand the terrain and proceed with care.

* Alternative investments may not be suitable for all investors and involve special risks, such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

** This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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