Optimize Your Returns: The Benefits of Tax-Advantaged Alternative Investments

Optimize Your Returns: The Benefits of Tax-Advantaged Alternative Investments

April 12, 2023

If you have a retirement portfolio primarily composed of stocks and bonds, you may have heard the advice to diversify your investments. One way to achieve greater diversification is through tax-advantaged alternative investments. Since the JOBS Act was passed almost a decade ago, more people have been able to invest in certain alternative investment opportunities that were once exclusive to only a select few. These investment options are available through specific retirement accounts, enabling individuals to broaden their investment portfolio and reduce risk.

Are you wondering if alternative investments are right for your investment portfolio? In essence, these options are investments made outside of traditional stocks and bonds, encompassing a broad spectrum of asset classes. They may include tangible assets such as fine art or precious metals, or financial investments like venture capital or private equity. Common examples of alternative investments include hedge funds, private equity, venture capital, oil and gas, and real estate. By diversifying your portfolio with alternative investments, you can reduce your portfolio’s overall risk and potentially enhance your returns. Read the following insights from the Favor Wealth team to learn more about these alternatives.

Benefits of Alternative Investments

One of the strongest arguments for investors to utilize this class of investments is the fact that alternative investments do not correlate to the stock market. This can add much-needed diversification to a portfolio, which will help investors avoid volatility and be better prepared for retirement. While the rate of return, of course, is not guaranteed, there is a potential for returns to be much greater than traditional investments, like stocks and bonds.

Tax Advantages

Another aspect to consider is the tax advantages some alternative investments offer the investment. The way a particular alternative investment is structured can enable the investors to keep more of their profit. Also, investors can become part owners of a fund, and any tax benefits available to the fund can get passed on directly to the investor-owner. 

Additionally, because you can invest through certain retirement accounts, such as an IRA, your investment can be tax-deferred or tax-free.

What to Consider

Some drawbacks to consider include the illiquidity of the investment. While some alternative investments offer income right away, many of them are wrapped up in a physical asset, which makes it difficult for investors to get any return right away. Sometimes the investor must commit their financial investment for several years before they can access any liquidity. 

Additionally, some alternative investment strategies still maintain very high barriers to entry, meaning purchasing the investment is too expensive for some investors. They often also have higher fees associated with them. Lastly, alternative investments can offer more volatility than an average investment: While there can be incredible gains associated with the investment, there also can be very dramatic losses. 

However, since the financial crisis of 2008, there has been more of an effort to appeal to the average investor, and that means that many alternative funds now provide some liquidity and price transparency

Ready to Expand Your Options?

Alternative investments come in a variety of types, each with its own set of advantages and disadvantages. If you’ve solely relied on the stock market for investments, exploring alternative investment options can diversify your retirement portfolio. We at Favor Wealth

are here to assist you in determining whether alternative investments are suitable for your wealth management objectives. We can identify an ideal alternative investment approach that aligns with your portfolio. To get started with a fee-based fiduciary you can trust, contact us at 626-529-0445 or email Ricky directly at info@favorwealth.com

About Ricky

Ricky Biel is founder, wealth manager and Chartered Retirement Planning Counselorâ„  professional at Favor Wealth, an independent financial advisory firm serving individuals and families near Pasadena, California. Ricky Biel founded Favor Wealth with a desire to provide unbiased, client-centered, community-based financial advice. Ricky and his team of caring, smart professionals want their clients to feel like they’ve done them a favor, making it easier than ever to accomplish their financial goals by blending proven investment methodologies with creative financial technologies. He is on a mission to help his family of clients feel both a sense of relief and excitement about their future. Favor Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the Favor Wealth team may be able to help, contact them today at 626-529-0445 or email Ricky directly at info@favorwealth.com

The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Favor Wealth Advisors’ employees providing such comments, and should not be regarded as a description of advisory services provided by Favor Wealth Advisors or performance returns of any Favor Wealth Advisors’ Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Favor Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.