An Alternative to What?

alternative investment

An Alternative to What?

Right around the beginning of the financial crisis in 2008, the term “alternative investment” became a more popular and widely used phrase in the investing universe. Primarily, the introduction of alternatives to more and more individual investors has driven this. In the past, institutional investors — like pensions —  were the main players in the segment.

To this day, I still get many puzzled looks — for lack of a better term — when the topic comes up. Often, I think the uncertainty comes down to a mix of sometimes overused flash phrases in the investing world and also just a plain and simple question: An alternative to … what?

So let’s explore what an alternative investment actually is. In essence, it’s a couple of things — but I think it’s all best explained starting with what it’s not.

Traditional investments

To have an alternative, you must first have the traditional. Traditional investments, at least for the purpose of our discussion, are the things that most individual investors — homeowners or not — have been using for decades. These are things like corporate stocks, bonds, mutual funds, and cash. However, it is not only what a traditional investment is but also how investors use traditional investments. Traditional investing also implies being “long” a particular investment — or buying and holding without plans to sell — and attempting to profit when the price moves up.

And their alternatives

Then you have the alternative. What “alternative” essentially implies here is that when the traditional zigs, the alternative zags. This means that what happens to the price of a traditional investment has no bearing on what happens to the price of an alternative investment — and vice versa. To utilize one of those overused flash phrases, we call this “low or negative correlation” in the investing world.

Earlier, I mentioned that an alternative investment is actually a couple of things, and here is where utilization comes into play. First, you have alternative assets — think of things that are not corporate stocks, bonds, or cash. Perhaps that means gold, silver, or other commodities like wheat or oil, and then even something like real estate or cryptocurrencies.

Alternative strategies

Next there are alternative strategies. If the traditional strategy attempts to profit from a price moving up, an alternative strategy may attempt to profit from a price moving down. Something we call being “short.” An alternative strategy may also involve a combination of being “long” and “short.” This is an attempt to tease out the relationship between the alternative itself and a traditional investment while still attempting to maintain a bias of profiting from upward price movement.

Now I’ll put on a bigger financial nerd hat here for a moment. The main benefit of utilizing an alternative investment within a well-diversified portfolio is the low or negative correlation. The math behind variability of returns — a way to measure risk — works out like so: If two investments have an identical measure of variability of returns independently, their overall variability of returns, when combined together, will be lower if their correlation to each other is low or negative. At least by this measure, lower variability of returns means less risk. It’s really cool stuff.

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Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of Financial Planning Fort Collins, a 100% employee-owned and fee-only firm. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network (XYPN). Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.



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Assets Under ManagementFee as a % of AUM
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MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
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Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
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inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
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The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
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Financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
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Assets Under Management (AUM)Annual fee as % of AUM or flat-dollar
$0 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 - $2,999,9990.50%
$3,000,000 - $3,999,999$15,000
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Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. Our transparent pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
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