Financial Fresh Start

As we reflect on the past year and set resolutions for 2025, it’s crucial to also review your portfolio, investments, and the strategies you implemented. While your plans and outcomes may differ, reflection can bring clarity.

When it comes to all investing, but particularly in respect to alternative investments, there are several key areas to consider:

– Analysis of Performance: Evaluate what worked as expect

ed and why. Consider whether this strategy can be repeated in 2025 or if it’s time to move on. Based on what worked, assess if your allocation is too high compared to other holdings. For alternative investments, a general rule is to maintain a 20% allocation to your liquid net worth. Individual investments should ideally be in the 1-10% range, with higher allocations only if the investment is diversified.

– Analysis of What Didn’t Work: This category may reveal new opportunities. For instance, investments exposed to multi-family properties experienced significant value declines when the Fed increased interest rates more rapidly than anticipated. This could have negatively impacted your investment, but the thesis that multi-family remains in demand suggests that it might be an opportune time to add more due to its current decline.

– Transparency: Investing in public stocks or mutual funds provides access to various sources of information, including ticker updates and analyst coverage. Alternative investments, however, lack this benefit. You’ll need to rely on updates from the sponsor and your advisor. Many experienced advisors in the alternative investment space keep their playbooks updated “after the sale” so that they can provide insights into current trends and potential future developments.

– Setting Benchmarks: Wise investors have a benchmark for returns. Comparing your performance to this benchmark can help you identify areas for improvement and make necessary adjustments for the new year.

– Risk Management: Don’t forget to consider risk. Alternative investments can be more volatile than traditional assets, so it’s essential to manage risk effectively.

Portfolio Review

By thoroughly reviewing your portfolio, analyzing performance, and considering these factors, you can gain clarity and make informed decisions to enhance your investment strategy in 2025.

While performance is crucial, especially for accredited investments, it’s equally important to analyze the current risk of your holdings. Assess whether that risk has increased or decreased since your original investment. Sometimes, underperforming or even losing investments can reduce risk because they’re now smaller holdings. However, simply selling underperforming investments solely because their value decreases isn’t always the best course of action.

Did your risk change?

This is significant, especially at the end of the year. You’ve aged a year and are closer to achieving your portfolio goals. If you need the principal, investments shouldn’t be held for less than 5-7 years, depending on the investment. Most alternative investments have limited liquidity, so review the lock-up period as the investment matures. If you plan to roll into the next investment and need cash before the lock-up period expires, ensure that doesn’t happen.

Have your goals changed?

Change is the only constant in life, and if your goals have shifted, your portfolio and alternative investment allocations should be reviewed to align with your new goals, considering your risk tolerance and timeframe.

As a last act in 2024 or first act of 2025, conducting an end-of-year review of your portfolio, particularly when it includes alternative investments, is an essential practice for making informed adjustments and planning for the future. By analyzing performance, reassessing risk, and aligning your strategy with evolving goals, you can approach 2025 with greater clarity and confidence. Don’t overlook the unique characteristics of alternative investments, including their limited transparency and liquidity, and be sure to leverage the insights of your financial advisor to stay well-informed. Consistency in your review process and proactive engagement with sponsors will ensure you’re prepared for both opportunities and challenges that lie ahead.

Don’t forget Uncle Sam! Taxes further complicate end-of-year planning and rebalancing. Alternative investments can help defer capital gains if you sell “winners” and don’t have enough “losers” to offset the gains. However, the Trump tax cuts are in limbo (they’ll expire unless something is done), further complicating the “right” answer.

Consistency is key. End-of-year reviews work best when done annually. Quarterly reviews are the standard cycle, but that doesn’t mean you make changes quarterly. In fact, that approach has been proven detrimental to most people and portfolios.

1. Performance Analysis: When reviewing performance, a diversified allocation to alternative investments (20% of a portfolio, as you mentioned) can enhance returns and lower volatility, especially in uncertain markets. Industry sources like J.P. Morgan suggest that including private equity, infrastructure, and real estate in a diversified alternatives portfolio can improve long-term returns while managing risks across market cycles. The level of allocation should depend on an investor’s risk tolerance—whether conservative, balanced, or aggressive—and be adjusted based on the lessons of the past year and the outlook for 2025​
2. Understanding What Didn’t Work: The evolving macroeconomic environment, including inflation and rising interest rates, has had significant impacts on certain sectors, such as multi-family real estate. According to industry analyses, central bank actions in the developed world, like aggressive rate hikes, have influenced private market performance, particularly in real estate. Despite this, the demand for housing remains strong, which could present new opportunities as prices decline due to higher interest rates
3. Transparency Challenges: Alternative investments lack the same level of public information as stocks or mutual funds. Relying on sponsor updates alone can limit your ability to make informed decisions. The role of an experienced advisor becomes crucial here, as they often have access to inside information (“scuttlebutt”) and can provide insights beyond public reports. Staying in close communication with your advisor to ensure you’re aware of any developments not formally disclosed is key to making informed decisions​.
4. Risk Management: Managing risk in alternatives requires careful attention to liquidity, lock-up periods, and changing economic conditions. For instance, Mercer highlights how higher interest rates and increased capital costs are reshaping private equity and other alternatives. As market dynamics evolve, active management becomes vital to mitigating downside risks and ensuring alternative investments remain aligned with overall portfolio goals​.

The most important thing you can do if you are an owner of an alternative investment is to stay on top of the sponsor to find out the things that aren’t in the updates they share with the public. Most alternative investments are only available through financial advisors, and good financial advisors know the “scuttlebutt” of what’s really going on.

Reviewing your assets should also mean reviewing the stories and theories that were considered relevant for your investment in the alternative investments. The lack of public transparency and public access is a good thing for performance of alternative investments since the stock market can’t take value away. The value of the alternative investment stands on its own good or bad. But because you can own an investment and the only information you get about the investment comes from the sponsor you need to have other sources of information so you can make a fair analysis of the holding. Leveraging your financial advisor’s network with that sponsor can give you peace in mind or let you know when there’s an issue and give you time to address the issue.

Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.

This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.