401k Maxed Out…What About Alternative Investments?

imagesIn 2015, the US government increased the 401k contribution amount to $18,000/year (up from $17,500). High earners often find that they can easily reach this contribution amount quickly. The next common investment tool is a Roth IRA which allows an annual contribution of up to $5,500 (check with an advisor for exact contribution amounts for your specific situation.)

The tax incentives offered by 401k plans and IRAs allow investors to defer or avoid paying taxes on their retirement income, making them powerful retirement planning tools. Tax breaks are also a reason why most people use programs such as a Roth IRA, 401k, 403b, SEP IRA, etc. when investing for retirement. However, once these contribution limits are reached, our clients often ask about the next best investment option(s).

In the past year or so, there has been a lot of talk about “alternative” investments. While many of these opportunities offer good returns, they are not without significant risks. Investopedia defines an alternative investment as one that is not in one of the three traditional asset types (stocks, bonds and cash). Compared with mutual funds and ETFs, many alternative options have high minimum investments and fee structures. They are subject to less regulation, however, they also have limited performance data information available. They are desirable to some investors because they have a low correlation from standard asset classes and have high returns. Examples of alternative investments include:

Real assets – The category of real assets focuses on investments having direct ownership of non-financial assets rather than through financial sources. These include:

• Real estate –  real estate focuses on land and improvements that are permanent such as buildings.
• Timberland –  this includes both land and the timber used in the forest products industry. While the land is defined as real estate, the timber on the land is not typically regarded as such since it is not permanently affixed.
• Infrastructure – these are claims on the income of toll roads, regulated utilities, ports, airports and other real assets that are traditionally held and controlled by the public sector.
• Intangible assets – these include intellectual property such as patents, copyrights, trademarks, music, film and publishing royalties.

Hedge Funds – Hedge funds are one of the most talked about areas of alternative investments. They are a privately organized investment vehicle that uses a less regulated nature to generate opportunities substantially different from those provided by traditional investment tools.

Commodities – Commodities are investments distinguished by their emphasis on futures contracts, physical commodities or both. They are uniform goods available in large quantities, such as energy, agriculture and building materials.

Private Equity – The term private equity includes both equity and debt positions that are not publicly traded. This class of investments includes:

• Venture capital – this refers to financial support to start-up companies that do not have a sufficient size, track record or desire to attract capital from traditional sources.
• Leveraged buyouts – this investment includes transactions in which the equity of a publicly traded company is purchased using a small amount of investor capital and a large amount of borrowed funds.
• Mezzanine debt – mezzanine debt refers to a range of risky claims including preferred stock and convertible debt.
• Distressed debt – this refers to the debt of companies that have filed or are likely to file for bankruptcy protection.

Structured Products – Structured products are instruments that generate unique income resulting from a partitioning of cash flow of a traditional investment or by linking the returns of the structured product to one or more market values.

While there is a great deal of opportunity investing in alternative options, it is important to remember that non-fiduciary advisors and brokers might try to sell you a product based on the kick-back they will receive for the sale. This is why we always recommend discussing your financial picture and future plans and goals with a qualified fee-only fiduciary advisor who will guide you towards the alternative investments that are in your best interest.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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