Restarting Financial Prospects
As we think back on the past year and plan for 2025, it's vital to examination your portfolio and investments, as well as the strategies you employed. Regardless of how your plans turned out, reflection can bring understanding.
In the realm of investing, particularly alternative investments, there are certain areas that require attention:
- Performance Evaluation: Assess what worked and why. Determine if this strategy should be repeated in 2025, or if it's time for a change. Consider if your allocation is too high compared to other investments. For alternative investments, a general guideline is to allocate 20% to your liquid net worth, with individual investments ideally falling within the 1-10% range, unless they're diversified.
- What Didn't Work: This category could uncover new possibilities. For example, investments in multi-family properties may have witnessed significant value decreases when interest rates increased more rapidly than anticipated. While this could have negatively impacted your investment, the ongoing demand for multi-family properties suggests that it might be a good time to invest more due to its current decline.
- Transparency: Public stocks and mutual funds provide various sources of info, such as ticker updates and analyst coverage. However, alternative investments lack this advantage. You'll need to depend on updates from the sponsor and your advisor. Many experienced advisors in the alternative investment space keep their strategies updated "after the sale" to provide insights into current trends and potential future developments.
- Benchmarks: Establish a benchmark for returns. Comparing your performance to this benchmark can help you identify improvement areas and make necessary adjustments for the new year.
- Risk Management: Don't neglect risk. Alternative investments can be more volatile than traditional assets, so risk management is crucial.
By reviewing your portfolio in-depth, analyzing performance, and considering these factors, you can gain clarity and make informed decisions to boost your investment strategy for 2025.
While performance is crucial, particularly for accredited investments, it's equally important to assess the current risk of your holdings. Determine if that risk has increased or decreased since your initial investment. Sometimes, underperforming investments can actually reduce risk because they're now smaller holdings. However, simply selling underperforming investments solely because their value decreased isn't always the best approach.
Has risk changed?
This is particularly significant at the end of the year. As a year has passed and you're closer to achieving your portfolio goals, investments should ideally not be held for less than 5-7 years, depending on the investment. Most alternative investments have limited liquidity, so review the lock-up period as the investment matures. If you plan to roll into the next investment and need cash before the lock-up period expires, ensure that doesn't happen.
Have goals changed?
Life is constantly changing, and if your goals have evolved, your portfolio and alternative investment allocations should be reviewed to align with your new goals, considering your risk tolerance and timeframe.
Conducting an end-of-year review of your portfolio, especially for alternative investments, is an essential practice for making informed adjustments and planning for the future. By analyzing performance, reassessing risk, and aligning your strategy with evolving goals, you can approach 2025 with greater understanding and confidence. Don't overlook the unique characteristics of alternative investments, such as their limited transparency and liquidity, and be sure to leverage the insights of your financial advisor to stay informed. Consistency in your review process and proactive engagement with sponsors will ensure you're prepared for both opportunities and challenges that lie ahead.
Remember Uncle Sam: Taxes further complicate end-of-year planning and rebalancing. Alternative investments can help defer capital gains if you sell "winners" and don't have enough "losers" to offset the gains. However, the Trump tax cuts are uncertain (they'll expire unless something is done), adding to the complexity.
Consistency is key. Annual reviews work best. Quarterly reviews are the standard cycle, but it's not necessary to make changes quarterly. In fact, making changes too frequently can be harmful to most people and portfolios.
- Improving Returns and Reducing Volatility: When examining performance, incorporating 20% of alternative investments into a portfolio can boost returns and decrease instability, particularly during unpredictable market conditions. Research from firms like J.P. Morgan suggests integrating private equity, infrastructure, and real estate into a diverse alternatives portfolio can enhance long-term earnings while managing risks throughout various market cycles. The percentage of investment should align with an investor's risk appetite—whether conservative, balanced, or aggressive—and be adjusted based on lessons learned from the past year and predictions for 2025.
- Identifying Challenges: The evolving economic climate, marked by inflation and rising interest rates, has had detrimental effects on certain sectors, such as multi-family real estate. According to industry research, central bank actions in developed nations, such as aggressive rate hikes, have influenced private market performance, notably in real estate. Despite this, the demand for housing remains robust, potentially creating fresh opportunities as property prices decrease due to higher interest rates.
- Navigating Information Gaps: Alternative investments lack the same extent of public information as stocks or mutual funds. Relying solely on sponsor updates might limit your decision-making capabilities. In this scenario, the expertise of an experienced advisor becomes indispensable, as they typically have inside knowledge ("insider gossip") and can provide insights beyond public filings. Regular communication with your advisor to be informed about undisclosed developments is vital to making well-informed decisions.
- Managing Risks: Overseeing risks in alternatives necessitates meticulous attention to liquidity, lock-up periods, and changing economic circumstances. For instance, Mercer has emphasized how higher interest rates and increased capital costs are redefining private equity and other alternatives. With market dynamics evolving, proactive management is essential for minimizing downside risks and aligning alternative investments with overall portfolio objectives.
The most significant responsibility you have as an owner of alternative investments is to keep tabs on the sponsor to be informed about information that is not disclosed in their public updates. Most alternative investments are available only through financial advisors, and skilled advisors have inside knowledge of the "insider gossip."
Evaluating your investments should also involve revisiting the theories and considerations that influenced your decision to invest in alternative investments. The absence of public transparency and access is advantageous for alternative investments, as the stock market cannot diminish their value. However, because the only data you receive about your investment comes from the sponsor, you need additional sources of information to make a fair assessment of your holding. Leaning on your financial advisor's network with that sponsor can offer you peace of mind or alert you to potential issues, giving you time to address them.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.
- To optimize returns and reduce volatility, consider allocating up to 20% of your portfolio to alternative investments, as suggested by financial institutions like J.P. Morgan, which can enhance earnings while managing risks throughout different market cycles.
- The evolving economic climate has impacted certain sectors, such as multi-family real estate, due to increased interest rates and central bank actions. However, the ongoing demand for housing might create opportunities as property prices decrease. It's essential to analyze these challenges and adjust your investment strategy accordingly.
