If you’ve been investing long enough, you know all about the traditional 60/40 split—where 60% of your portfolio is allocated to stocks and 40% to bonds.
This was considered a healthy, reliable way to invest, with stocks as a growth component and bonds as a safer, income-generating asset.
The 60/40 split worked well for decades—until it didn’t.
Now, wealth advisors are helping investors take a more diversified approach, including alternative investment funds such as private mortgage REITs.
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Why are alternative investment funds gaining popularity?
Alternative investments are assets outside of “traditional” investment categories like stocks, bonds, and cash.
They have different risk vs. return profiles compared to traditional investments, which helps to create a more balanced portfolio.
Examples of alternative investments include:
- Private equity
- Hedge funds
- Real estate
- Commodities
- Private debt funds
Alternative investments can either be used to complement or replace traditional stocks and bonds.
A wealth advisor’s role is to help investors devise the best strategy for their unique investment goals and desires.
Benefits of alternative investments
The 60/40 portfolio is leaving investors vulnerable in today’s challenging market.
The main advantage of alternative investments is to diversify and strengthen it.
Other benefits include:
- Potential to deliver higher returns than traditional investments
- Protection against inflation
- Lower correlation with public markets
Alternative investment funds suit a wide range of investor goals
Numerous alternative investment strategies are available to investors, which gives them the flexibility to customize their portfolios in a way that works best for them.
From conservative to growth-focused or income-seeking investors, investors can build a portfolio that checks all of their boxes.
Some alternative investments, such as private mortgage real estate investment trusts (REITs), can hit multiple targets simultaneously.
What is the appeal of private mortgage REITs?
Private mortgage REITs invest in real estate debt rather than owning physical properties.
More specifically, they provide mortgages for real estate purchases or developments.
Private mortgage REITs aren’t listed on a major exchange and aren’t subject to most SEC regulations, so they are only offered to accredited and institutional investors.
How private mortgage REITs work
Private mortgage REITs, also known as private mREITs, act as lenders by offering various types of real estate-backed loans, such as:
- Residential loans
- Commercial loans
- Bridge loans
- Fix-and-flip loans
- Construction loans
They generate income primarily through interest payments and any associated fees and are required by law to distribute at least 90% of their taxable income to investors as dividends.
Public vs. private REITs
Private REITs are not publicly traded, so they are less liquid than public REITs.
However, private REITs have fewer regulatory constraints and can cater to investors who want higher returns and access to more exclusive real estate markets.
The focus is on long-term growth and risk-adjusted returns that can outperform the market.
Benefits of private mortgage REITs
The key benefits of private mREITs include:
- Potential for higher returns
- Less sensitive to stock market performance
- Tax benefits
- Diversification
Private mortgage REITs also allow investors to invest in real estate without directly buying or managing properties—which, for some, is the main appeal.
The role of wealth advisors in the shift to alternatives
Events in the past few years have proven that an over-reliance on stocks and bonds is not a healthy investment approach.
As economic uncertainty, geopolitical events, and inflation continue to wreak havoc on the market, wealth advisors are increasingly exploring alternative options that offer protection against these factors—and higher income potential.
How are wealth advisors evaluating alternative investments?
Wealth advisors carefully scrutinize alternative investments to ensure they align with their clients’ objectives.
To determine the best course of action, advisors are considering the following:
- Risk tolerance: How much risk is the client willing to accept? Do they fully understand the risks involved and match the client’s risk profile?
- Investment timeline: Does the client need quick access to funds, or are they holding on for the long term?
- Liquidity: Does the client need investments with higher or lower liquidity or a mix of both?
- Due diligence: How has the investment performed historically? Is it positioned to perform well even in fluctuating markets?
For private mREITs, in particular, the advisor will consider who manages the fund and the quality and diversity of the loan portfolio.
What does a newly balanced portfolio look like?
The answer to this question is no longer one-size-fits-all and depends largely on the investor’s needs and goals.
For example, if an investor is considering adding private mREITs to their portfolio, they can add this into an existing mix of stocks, bonds, or other asset classes at a percentage that works for them.
Considerations for mREITs and alternative investments
A large part of a wealth advisor’s role is helping investors understand the full risks and benefits of a particular investment.
Alternative investments can be complex and may not easily be understood by the average investor or advisor.
Tips for mitigating the risks of private mREITs and other alternative investments:
- Work with an experienced advisor: Investors must find an advisor who understands alternative investment funds and private mREITs, and wealth advisors must work to become this knowledgeable, reliable resource.
- Diversify, diversify, diversify: Spreading investments across multiple asset classes, locations, and sectors can help investors soften the blow of a downturn in any particular market.
- Carefully select the investments: Thorough due diligence is key to selecting high-quality and well-managed funds.
- Maintain a mix of liquidity and illiquidity: Many alt investments are illiquid, so a healthy mix of assets can help them meet long-term and short-term needs.
- Monitor the market: Stay up-to-date on the real estate market and economic conditions, which can impact the performance of certain investments.
- Keep learning: And keep reviewing the performance of the investments so you can be proactive as conditions evolve.
Every investment has risks and rewards—it’s up to every individual investor and their advisor to determine what’s worth.
Invest in private mortgage REITs with Marquee Funding Group
Marquee Funding Group finances responsible investments that are flexible but not speculative to ensure we provide the same duty of care and fiduciary responsibility you get from publicly traded funds.
Start investing in private real estate debt through Marquee Capital Fund 1 and enjoy a preferred return of 8%. Learn more about the Fund with a 30-minute consultation.
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