Alternative Investments
Alternative Investments are one of the following: commodities,
commodity future contracts, ETN's, various exotic strategies used by
hedge funds, buying an option on a volatility index, short selling,
derivatives, covered or uncovered
call or put writing strategies, also direct ownership in timber farms,
oil drilling ventures, etc. What is not an alternative
investment would be straight forward ownership of stocks, bonds, real
estate, bank CD's, etc. During the great bubble of 1997-2008 when
"real" interest rates were very low many investors felt that investment
returns were too low and so they "plunged" into riskier alternative
investments in the hopes of making a profit.
If an investor insists on investing in alternative
investments then they should do an integrated financial plan to examine
if they can handle this risk how much risk they can
handle. If someone wants to buy alternative
investments then it is important to have a
diversified an uncorrelated portfolio, where the risk of one asset
maybe offset by the
potential gain of another asset that moves in opposite direction, is
something that should be examined. However, during crashes most
classes of investment assets tend to go down together. Tax consequences
should be
examined by the client so that the client can decide if the tax traps
of alternative
investing are worth tolerating. For example, these could create
UBI inside of an IRA which is not allowed by the tax code. Short term
gains (instead of long term gains), loss of the 15% dividend tax rate,
denial of interest deductions, capital losses over $3,000 that must be
deducted over many years are all examples of tax risks associated with alternative
investments. Gains from commodities contracts and from collectibles are
taxed at higher rates than stocks. However, holding them in an IRA is
not appropriate because IRA's should be a place for low risk funds for
one's retirement. Further some exotic investments such as collectibles,
or bullion are not allowed in an IRA or 401k, etc.
Mayflower Capital
Donald
Martin, CFP®
1000 Fremont Ave.
Ste.
135
Los
Altos,
CA 94024
(650) 949-0775
Don@mayflowercapital.com
Donald
Martin is a Napfa
registered fee-only financial planner and investment advisor.
