Alternative investments are products that are usually non-correlated to the stock or bond market. Non-correlation means that when stocks skyrocket one year, alternatives will not necessarily follow. And when stocks suffer significant losses another year, alternative investments are not likely to follow. Because of this non-correlation, the use of alternative investments in a stock and bond portfolio can reduce volatility in an investment plan.
Alternative investments include a variety of asset classes. The most popular is real estate, which includes real estate investment trusts (REITs). REITs are funds that hold commercial real estate, like office, warehouse and industrial, multifamily (apartment complexes), retail, and hospitality. Other types of alternative investments include mortgage and corporate debt, private equity, and commodities.
The challenge for most investors is, many advisors are not licensed and credentialed to offer these products. As a result, they are not made available to many investors who could benefit from non-correlation and diversification. Like annuities, alternative investments are sometimes underexplained and underused. A good example is REITs. Some advisors who focus purely on stocks and bonds have unflattering stories about REITS and recommend against their use. Sometimes, their firms do not offer these, or they are not licensed to recommend them. So, the unflattering stories support their circumstances. But looking back at 20 years from 1999 to 2019, REITs outperformed stocks, bonds, and many other asset classes. This 20-year lookback does not mean that REITS will outperform again. It does mean that clients who did not own REITs during that period because of an advisor’s recommendation missed out on the opportunity for growth, non-correlation, and diversification.
At Cornerstone, being independent and properly credentialed on these products means that we can talk with our clients about alternative investments. We recommend alternative investments judiciously. Less than 10% of the investments Cornerstone manage are in alternative investments. For our clients who own alternative investments, it continues to provide them with a buffer from stocks and bonds and delivers tax-efficient dividends that many stocks cannot.
Not all investments are taxed the same. Some offer tax shelter that exempts 20% to 40% of the income from being taxed. Some are taxed at a lower dividend rate. And others are not taxed at all.
Since investments are taxed differently, the measurement that helps determine what investors keep in their pockets is the return after personal taxes are paid.
In this instance, an investment with a lower gross return can deliver a higher return after taxes. This advantage becomes critical for those in retirement and drawing income from their accounts.
The challenge is that most investors and advisors measure only gross performance as an indication of success. This single measurement can result in lower spendable income for retirees.
At Cornerstone, we understand the impact of taxes inside a portfolio and retirement income. We are not swinging for the fences. Instead, we are seeking to score as many runs for our clients as possible.
For investors who are already generating a high income from real estate they own, tax-advantaged investing can reduce their tax profile.
For others who may be entirely dependent on funding retirement income with social security, taxable, and retirement accounts, we help with an income distribution strategy that seeks to generate higher usable income.
Drawing from different accounts to coordinate a lower personal tax is called “tax-bracket management.”
If you would like to manage taxes before and into retirement, Cornerstone can help with that.
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