Alternative Investments

An alternative investment is an asset that is not one of the traditional investments. It has low correlation to stocks and negative correlation to bonds. This makes alternative investment an attractive diversifier in reducing impact of market volatility and preserving the portfolio values.

Most investors diversify their portfolio within stocks (i.e., a mix of small-, mid-, and large-cap stocks) which can have high correlation among each other. At Upright Planning, we believe incorporating alternative investments is usually a better approach in portfolio construction.

We have successfully used non-traded real estate investment trust (REIT) and business development corporation (BDC) in our clients’ portfolio to help reach their financial objectives in income stream and potential growth. Investors should speak to a financial advisor to understand the risks and consider their goals before investing.

Non-Traded Real Estate Investment Trust (REIT)

Created by U.S. Congress in 1960, a REIT is a type of security that allows both small and large investors to acquire ownership in real estate through property or mortgage. They receive special tax considerations and typically offer high dividend yields. REITs are required by law to maintain dividend payout ratios of at least 90% of earnings, making them a favorite for income-seeking investors.

A non-traded REIT does not trade on a securities exchange market. It has less liquidity, but this means almost no market volatility.  This makes non-traded REIT a key consideration in portfolio construction. In short, non-traded REIT provides stable income stream, potential capital appreciation, which make them excellent counterbalance to stocks, bonds and cash.

Business Development Corporation (BDC)

A BDC is an organization that invests in and helps small- and medium-size companies grow in the initial stages of their development. The U.S. Congress created BDCs in 1980 to assist emerging U.S. businesses in raising funds and fuel job growth.Because BDCs are regulated investment companies, they must distribute over 90% of their profits to shareholders, which results in above-average dividend yields.

There are only 4% of the companies with revenue of more than $25 millions have stocks traded in national stock markets. The remaining 96% of the companies are not accessible by individual investors¹. BDC provides them an opportunity to participate the growth of those private companies.

BDC investments diversify investors' portfolio with securities that can display substantially different returns from stocks and bonds.

¹FS Investments