(Naples Florida Weekly) - Lately, we have been getting calls from investors who invested directly in alternative investments, often involving fractional interests or pooled funds in real estate, art, tankers, life insurance, legal proceedings, etc., without the assistance or guidance of an investment professional.
These are appealing investments in that they create access to types of investments that most retail investors cannot afford (on an individual basis) and are not able to oversee or manage on an individual basis. However, much like communism, the concept is much more appealing than the reality. These pooled investments and fractional ownership concepts are fraught with problems, just some of which are outlined below.
The argument that these products should be in your portfolio because they have little correlation to your stock or bond portfolio is flawed. The primary purpose of having uncorrelated assets (i.e., diversifying your investments) is to reduce risk. As a result, investing in speculative investments where you can lose 100% of your investment as a way of reducing the risk of your overall portfolio is a bad idea, regardless of the conceptual diversifying effect.
Moreover, your inability to sell these products when you want is another major problem. Given the current state of the world in terms of inflation and world events, you should not ignore or downplay the risks of investing in products which cannot be sold on a fluid market and, in some cases, cannot be sold for years.
Additionally, retail investors often neglect to analyze the motivations behind the promotors of these products and the sellers of the underlying assets. The promotors are handsomely compensated for effectively transferring the asset from an institutional or high net worth investor to you and other retail investors. And, the institutional and high net worth investors selling these assets are effectively betting that it is a good time to sell, rather than buy, the assets being pitched to you. Breaking this down, you are buying from someone who is a salesperson, not an advisor, and the assets are available for you to buy because some savvy investors think it is a good time to get these assets out of their portfolio.
Remember, whatever it is, let’s make sure our money is working for us and not for somebody else. ¦
— Chris Vernon is an attorney with Vernon Litigation Group who represents clients in financial disputes throughout the United States. He is also licensed as a Registered Investment Advisor. Courts have accepted Mr. Vernon as an expert on investment- related issues as both a lawyer and an investment professional.
BY CHRIS VERNON
Special to Florida Weekly
March 17, 2022
