What To Watch Out For When Seeking ‘Non-Traditional’ Investments

February 20, 2019

The stock market is guaranteed to do one of two things: go up or go down. Because so many Americans are dependent on their 401(k)’s as their primary source for retirement, as a financial wellness coach I start to hear more investor discontent when the market is not doing well. When the market is going up, people tend to be content but when the market goes down, many investors go on a quest in search of the perfect investment.

Beware of “outside the box” investments

One of the most dangerous questions an investor can ask an advisor is, “Do you have anything other than mutual funds, stocks or bonds that give me a better return without taking on risk?” The reason I consider this a dangerous question is this is where an investment is often introduced that is hard to understand.

I recently read a story about an athlete that had sued his financial advisor for misconduct. Before I go further, let me emphatically state that the client is not at fault in cases of advisor misconduct. When I hear stories like this I can guess that the investment was something other than a traditional account before I read the details. One reason is the fact that most large firms have substantial checks and balances on advisors. It is difficult for the advisor to operate in felonious activity with traditional investments, but if there is some one-off, unique investment then an unscrupulous advisor may circumvent the built-in safeguards.

The reason most advisors stick to a narrow listing of investments is because that is what they are trained in. When clients ask for something different, the advisor may be able to pull some product off the shelf that functions differently, but in my experience those products tend to have a narrow application. Conversely, I have seen investors, in an effort to get away from traditional investments, squeeze themselves into investments that may have higher risk with a lower opportunity for return.

The exotic investment is never as easy as it sounds

If you move forward with something that’s different from the more typical stock market investments expect some rockiness. When going the road less traveled there is a reason there are not droves of others on the same road. Recognize there may be some risk that not even the person recommending it may be aware of. For example, pay close attention to the need for additional tax filings and keep track of any costs for those filings. This should count against your total rate of return.

Concierge service sounds nice, but beware

If someone is recommending an investment that may be complex, be mindful of trusting the advisor to make everything easy. If you are investing in real estate, expect to have to deal with tenant difficulties and repairs. If you are investing in a franchise, expect to see good and bad months. If you have an advisor or consultant telling how great things are going all the time you need to dig deeper – whoever is shielding you from the realities of these investments is not doing that for free and whatever they are paid will eat in to you returns.

It is ok to ride the downturn

You don’t have to stick to just stocks and bonds. I, along with many planners on our team, own investment real estate and other non-traditional investments not available through a brokerage firm. This is just a warning to make sure you have the time and risk appetite for these type of investments.

A buy and hold strategy of a stock- based portfolio can be difficult to watch on the downside but if your investments align with your goal it is ok to see down periods. A downturn is not a loss unless you sell at the bottom. If your allocation is reasonable and time is on your side, stick to it.