Understanding the Pros and Cons of Alternative Investments

Courtesy of: Juan Ocanas, Financial Advisor at Morgan Stanley

In today’s dynamic market environment, some investors may be looking beyond stocks and bonds for other options for investing their money. This search for other options may lead to alternative investments.

Alternative investments are investments outside the stock and bond markets, and may include currencies (including cryptocurrencies such as Bitcoin), commodities, real estate, private equity, hedge funds, precious metals and art or collectibles. These types of investments tend not to be correlated to the performance of stocks and bonds, and may offer the potential for higher returns, but typically with higher risk.

Here is an overview of what you need to know before investing.

Potential Upsides of Alternative Investments
Potential reduction in overall volatility. Since their performance is not correlated with the stock and bond markets, alternative investments may help to reduce overall volatility within a portfolio of traditional investments.

Diversification. Alternative investments typically help provide diversification across different markets, strategies, managers and investment styles.

Potential for increased performance. Like any investment, the rate of return for alternative investments is not guaranteed. However, according to a study called “The Rate of Return on Everything, 1870-2015,” which looked at performance across 16 advanced economies over a period of 145 years, residential real estate provided the best returns.1

Potential Downsides of Alternative Investments
Illiquidity. Alternative investments tend to be private, rather than public, and they are generally illiquid, so they may be difficult to exit and your money may be tied up for an extended period of time.

Lack of regulation. Alternative investments are not regulated and are not subject to reporting requirements. In addition, the underlying assets of alternative investments are often difficult to value, which leads to challenges in pricing and price transparency.

High minimum investments. Many alternative investments carry high minimum investments, and may not be available to all investors. In addition, alternative investments generally carry higher fees.

Complexity. Alternative investments are often complex instruments and may require a higher level of due diligence. If you are considering alternative investments, you also want to be sure that you research and understand the potential tax implications associated with them.

In the past, alternative investments were reserved for the domains of institutional and high-net-worth investors. However, in recent years, alternative investments have grown in popularity and are making their way into the portfolios of individual investors. Like all investments, alternative investments come with both benefits and risk. Before taking the leap into this sector, consult a Financial Advisor with experience in alternative investments who can help you determine whether this type of investment is right for you.

Morgan Stanley Naples Branch
(239) 449-7853
advisor.morganstanley.com/the-calleja-group

Juan Ocanas is a Financial Advisor in Naples at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at Juan.Ocanas@MorganStanley.com or by telephone at (239) 449-7853. His website is https://advisor.morganstanley.com/the-calleja-group

This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters.

Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. Alternative investments are appropriate only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of loss. Alternative Investments typically have higher fees than traditional investments.

Investors should carefully review and consider potential risks before investing.

Diversification does not guarantee a profit or protect against loss in a declining financial market.

Juan Ocanas may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration, https://advisor.morganstanley.com/the-calleja-group

© 2021 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 2877726 12/2020

Footnotes
1 Jordà, O., et al. The Rate of Return on Everything,
1870-2015. Published June 2017. Available at
http://conference.nber.org/confer/2017/SI2017/
EFGs17/Jorda_Knoll_Kuvshinov_Schularick_Taylor.pdf.

Disclosures
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.

Morgan Stanley Naples Branch
(239) 449-7853
advisor.morganstanley.com/the-calleja-group