When you’re in the world of alternatives, you get asked a lot about who the “winners” are. The first thing I tell people is that the right question is more focused on what your financial objectives are, not who makes headlines for ROI.
Alternatives can tiptoe between asset and liability when they’re not carefully selected in the context of your fully integrated financial world. From liquidity problems to surprise tax bills, your alternative strategy can’t be in a silo, separate from the rest of your financial plan.
To that end, here are the three most important factors we look at when selecting alternatives for your fully integrated financial plan.
1. Assess Cash Flow
The first thing we look at is cash flow. What’s your cash flow today? What’s it going to be like over the next few years?
On one hand, you may have a required investment. It may be up front, or it may be staged in over 2-5 years. Does that fit with your existing cash flow?
On the other hand, we can also be looking at cash flow from an investment like a private debt fund. In this instance, we’re more focused on what kind of cash flow you want to generate.
2. Understand Investment Horizons
The second thing would be the time horizon. What are you looking for in terms of the maturity of an investment?
If you’re looking for long-term income, then you may look for an option like a real estate investment with a long horizon. To use the real estate example, rising rents over 5, 10, or 20 years may be where the highest upside is.
If you’re looking for something that generates a return faster, you’re going to be looking at a different kind of investment altogether. There’s not one right answer about what investment is “best”, aside from understanding what kind of return you are looking for in your plan.
3. Anticipating Taxes
Then the last part–one that’s frequently overlooked. Many who invest in alternatives have not fully anticipated the tax liability. This is very specific to each person’s tax plan, but here are a few examples of what we look for:
- Are you in a higher tax bracket at the moment? Should we look for investments that throw off tax benefits, losses, or capital gains?
- Back to maturing timelines–how can we stagger your alternatives, so they don’t all come due in the same year and jack up your tax bracket?
- What about estate planning? Are you using the right kinds of trusts to preserve and fund alternative investments?
- How can we look ahead at coming tax law changes and position you for tax efficiency?
All of these topics need to be uncovered, and better yet, they are best uncovered in the context of a fully integrated financial plan.
