Marc Cuniberti Alternative investments are investments that usually are not listed on the Wall Street Journal, Investor Business Daily, or other public media outlets. I also refer to them as “privates”.
I have seen my share of private (alternative) investments, and although not all of them are bad, I wouldn’t touch most with a ten-foot pole. My opinion of course.
An alternative investment is one that an advisor or perhaps a friend or acquaintance may bring to an investor and suggest they invest funds.
Privates run the gamut from a second mortgage to a private bond or note, or perhaps investing into a company portfolio with some promise of return or gain. Energy or real estate projects are common as well. Privates can also fund projects to build such things as resorts, condominium complexes, or other entities, or just center around buying a mortgage contract where the investor is essentially the bank to the borrower, and secured by future profits. Whatever the underlying proposal, an above-average return on investment is offered, usually, more than an investor could get in the regular market. Hence the allure.
The key here is the offering is privately held and purchased, and its price is not listed anywhere on a public media platform like a newspaper or brokerage house stock screener.
I have always voiced my opposition to privates, as I have seen too many people burned on a variety of these offerings.
The contracts can vary and the fine print and disclaimers can be many.
The contracts usually suggest a date to maturity, and a suggested rate of return, but the disclaimers and fine print may give all sorts of “outs” to the offering entity. The contracts that I have seen certainly have addressed the owner’s interests over the investors, at least in my experience.
What can go wrong is obviously the issue. Some of the problems I have seen are plummeting prices in energy holdings, a real estate crash in property portfolios, defaults on the mortgages or private bonds, or an overall stock market crash or interest rate spike, which stresses out issuing company balance sheets. Dividends or payments also might stop or decrease, or the maturity date may be postponed (all legally of course due to the fine print).
The ramifications to the investor then revert to all those disclaimers and fine print he or she may not have bothered to read.
I always ask if market rates are say 2% to borrow money from a traditional bank or lending institution, why is the borrower paying you a much higher rate?
What you get paid also may not be counting the “take” for the selling agent which can be healthy. That means the borrower is paying even more than you’re getting.
Usually, any entity paying above-market rates is doing so because they can’t get money in the regular lending market. Not a good sign.
In other words, the risk involved from the borrower is higher than normal and therefore the investor is bearing the brunt of the increased risk.
In conclusion, with few exceptions such as lending funds for a sound and local second mortgage, I am of the opinion that most alternatives are not a good idea.
This article contains the opinions of Marc Cuniberti only and should not be construed as investment advice or a solicitation to buy or sell any securities, nor represents the opinion of any media platform, or any bank, investment, or advisory firm. Neither Money Management Radio (“Money Matters”) nor Bay Area Process receive, control, access, or monitor client funds, accounts, or portfolios. California Insurance License #0L34249. Insurance services are offered independently through Marc Cuniberti and not affiliated with any RIA firm or entity. (530) 559-1214. Website: moneymanagementradio.com
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