The World of Alternative Investments- Cents of Security Ep. 42
and so people are often looking at
alternative Investments because they’re
they want to diversify their portfolio
or because there are some high returns
that may be associated with them or
other things but you know people may
want to be careful with alternative
Investments because there can be a lot
of fees associated with them that makes
them you know pretty costly Investments
you’re listening to ibk’s sens of
security find more conversations at ibkr
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discussions are for information purposes
only and are not intended to portray
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disclosures at the end of today’s
episode now Welcome to our
show welcome back to the sense of
security podcast I’m Cassidy Clement
senior manager of SEO and content at
interactive brokers today I’m your host
for our podcast Our Guest is Danielle
laaka PhD and behavioral scientist for
Morning Star her recent research
examined how everyday invest or think
about alternative Investments
conventional Investments are always in
the spotlight but what about the
alternative ones how are investments in
art real estate and other assets helpful
in building your wealth well we’re going
to explore the topic today and in a
discussion on alternative Investments
look into some of Danielle’s research so
welcome to the program Danielle thank
you for having me of course so since
your first episode with us today what is
your background in the industry and what
exactly does a behavioral scientists
do yeah great um so my response here may
be a little unorthodox compared to some
of the other guests you’ve had but uh
bear with me I promise I’ll get around
to the point so prior to entering the
industry I got my PhD in Psychology from
the University of Michigan and was a
postto there afterwards and as I started
to think about what I wanted to do with
my research skills I started to realize
that I really wanted to do research that
could be used kind of by anybody to
improve their lives and so I started to
think about getting involved with
behavioral Finance now behavioral
Finance is basically the study of how we
interact with our money and you know I
thought this was pretty great for what I
wanted to do because after all we all
have to make decisions about money even
if my decision for the day is I don’t
want to think about it please make it go
away and I was fortunate enough to find
a group at Morningstar the behavioral
insights group that does work doing just
that and so I’ve been a behavioral
scientist in that position since 2022
but as you alluded to behavioral
scientist is not really a clear thing
for a lot of people so like I said we
all have to make financial decisions but
unfortunately we as humans don’t tend to
be very good at it um as just kind of a
rule I’m sorry I wish it were different
um you know our brains are really these
impressive efficient organs that are
really great at helping us make fast
decisions on little data and this has
served humans well not just in terms of
our ancestors but also like us today
think about how you would have to live
your life if you had to really think
about every single piece of information
and decision you wanted to make you
basically would never get the day
started so this fast thinking is really
important to us but it really can get us
into trouble when it comes to money so
as a behavioral scientist I conduct
studies on how everyday people think
about finances from their financial
goals to recessions to Alternative
Investments and from my research I glean
insights that can be applied by
individuals to help their financial
decision making that’s really
interesting actually behavioral Finance
back when I was in business school that
always was kind of one of the elusive
topics that you kind of touch on a
little bit in early business school and
101 but you never really delve uh I
think a lot of people like you had
mentioned maybe in uh master’s degrees
or PHD programs look a little bit more
deeply because there’s so many facets
that you have to understand both from
the psychological perspective and uh the
Financial area um so you’re to tie this
back to uh your research and the topic
today so alternative Investments that
area you were looking at how every day
investors more of the the average Joe if
you will of investors um are viewing or
thinking about alternative Investments
so to start down that path the most
basic question what exactly is an
alternative investment and how did you
focus on that in the study you did yeah
so very basic basically an alternative
investment is this broad term that
encompasses any asset that isn’t stocks
bonds or cash right so that means that
there are things as different as
cryptocurrency and your grandmother’s
antiques that both count as alternative
Investments and so people are often
looking at alternative Investments
because they’re they want to diversify
their portfolio or because there are
some high returns that may be associated
with them or other things but you know
people may want to be careful with
alternative Investments because there
can be a lot of fees associated with
them that makes them you know pretty
costly Investments there’s also tends to
be less transparency and liquidity
there’s also fewer regulations and there
tends to be more risk so there’s a whole
lot of different types of alternative
Investments out there but those are kind
of some of the general things that kind
of run throughout those different types
of Investments and in this study we
actually looked at nine different
alternative investments in total and I’m
going to spare you the full list because
some of them are quite technical um and
they’re not really worth going into at
this point in time but some of the big
alternative Investments that we looked
at were cryptocurrency which is just a
digital currency that us uses blockchain
technology Commodities which are basic
Goods that are typically traded in large
volumes like metals or livestock private
equity which involves buying ownership
in companies that usually involves
overhauling them and then selling them
and real estate invest Investment Trust
which are more commonly known by their
abbreviation reats which are are
companies that operate income generating
real estate well with all of those I
just want to give our own show two shout
outs so you had mentioned Grandma’s
Antiques and REITs so we actually did
have a podcast recently recorded on real
estate and we also have a podcast on
inheritance of how more people are we’ll
say most people are familiar with
finding themselves owners of some of
these antiques or art or anything along
that line and they maybe didn’t expect
to be in the alternative investment
space but now they have this old piece
of artwork that they’re like oh wait
this is worth some money so now I have
to learn about this Market that may be a
little bit more aligned with some of the
ways that some people are uh introduced
to this the other ways um the art or
Antiquity side maybe uh for younger
listeners or Millennial listeners the
Beanie Baby craze maybe poke on things
of that nature where you start to have
the Collectibles enter this space so
what did you find in the study to be
more of the popular alternative
Investments because there are some that
you said you didn’t even have to mention
because they were highly technical but
there may be ones that are so popular
that people may not realize like I had
mentioned the Collectibles area right
yeah so the results here is probably not
going to be too surprising to your
listeners which is that the most popular
alt in our study was crypto currency
about half of the people we surveyed
actually owned crypto and nearly
everybody was familiar with the
investment but Commodities were also
fairly popular um most people were
familiar with the investment and about a
third of the people we surveyed owned
Commodities but I will note that we
didn’t ask about every type of
alternative investment as as we
discussed it’s a really broad field and
and it’s just kind of not feasible to
ask about everything so it’s hard to
capture them all so like you talked
about there are Collectibles that’s a
very common one for people like things
like wine and coins or and Pokemon cards
I certainly have Pokemon cards uh
sitting in my parents closet uh and a
lot of people do view those as an
investment and there’s probably a you
know a decent group of people in the
world who not only know about
Collectibles but also probably have
collectibles in some way yeah I mean
there’s several different ways that
people can kind of get into the
alternative investment space whether
they realize it or not but I guess more
of a financially structured view on this
next question that I ask you you know
can anyone make an alternative
investment or is it a little more per
asset requirements that go into it
meaning crypto has a certain type of
invest investor profile that needs to be
met and commodities is a certain
investor profile that needs to be met
how exactly do you know or can anybody
kind of enter the room yeah as you
allude to and something that’s probably
going to come up a lot today is that it
depends on the investment so actually
many alternative Investments have a high
minimum investment threshold which means
that the amount of money you need to
just invest in the product at all can be
quite high so take for instance private
equity which we mentioned earlier the
minimum investment threshold for private
Equity can be in the hundreds of
thousands of dollars to millions of
dollars and and some of those situations
you might need to be an accredited
investor which means that you know your
net worth is over something like a
million dollars it’s not that everybody
can invest in every single different
type of alt there are some barriers to
entry but that being said there are many
big changes coming to finance because of
advances in Tech and also different
regulations and laws that are being
moved around in the world that actually
have been lowering the barrier to entry
for some alternative Investments so for
example some apps might actually allow
you to trade cryptocurrency with as
little as a dollar um however I think
there is an important distinction here
between can and should right so in our
study we also asked people why they
wanted to increase or decrease their
Holdings in alts and the most common
answer was that people were seeking to
maximize their returns now you may be
wondering why I’m bringing this up as
like a bad thing after all like aren’t
we investing for returns in the first
place uh but the problem with focusing
on returns is that it can lead to this
phenomenon called returns chasing which
often entails buying things that are hot
at the moment and dumping things that
are not and this is really one of those
classic cases of like the typical way
that we think that serves us well in
daily life is not serving us well in our
investing lives because returns chasing
is something that we want to avoid since
studies on the issue have shown that it
actually is quite costly not only
because you’re buying things when
they’re at their most expensive and
selling them when they’re their cheapest
but also because it racks up transaction
costs and another motivation that people
might want to be a little wary of when
it comes to you know should I invest in
an alternative asset was the uh people
kind of just discussed you know having
this feeling of confidence in an asset
and that’s why they wanted to to be
involved with it and the problem with
this is that you know we tend to think
um the way that people tend to think is
that we’re overconfident about our
stance on things even if we’re not an
expert on the topic and even if we don’t
even have like data to back us up so
perhaps you want to invest your money in
collecting sneakers because you are
really into sneakers and you feel pretty
confident that there will be a continued
Market interest in them so you actually
view your sneaker collection as part of
your long-term retirement plan but this
is is where that overconfidence may be
coming into Play Because when we look at
other instances of things like this you
mentioned beanie babies right the Beanie
Baby craze some people likewise thought
that their Beanie Baby collection was
going to be part of their retirement
plan and that they would be able to sell
them for hundreds of thousands of
dollars that they more than they got
them for and and that didn’t quite work
out for them as as expected so being
able to invest in an alternative
investment is really just the first part
of the equation and the rest of the
equation which is the bigger part is
determining whether you should invest in
an alternative
asset I think you mentioned a lot of
really good pieces that tie kind of back
into the behavioral conversation we were
talking about earlier so something to
think about um when it comes to the
psychology within Finance in general and
also the general consumer view on the
asset that you’re looking at is you know
is it more of the turn chasing or the
fear of missing out fomo is a huge thing
when it comes to uh you know Hot Topics
if you will of the day group think is
another one you know is it kind of that
you’re surrounded with other people who
are interested in this area and that
doesn’t necessarily reflect the majority
of the market it kind of reflects the
group or the small Niche that you’re
exposed to and then of course you know
more of the interest-based areas is it
mainly because you have an interest in
that you are so confident or is it more
the uh financial news you’re exposed to
versus the type of research that you’ve
done there’s many elements that can
impact um these types of Investments
when the financial metrics are not as
easy to find as those that are
conventional Investments such as you
know stocks and bonds where there are at
this point maybe hundreds of years worth
of metrics data and research that has
been conducted on it where crypto as we
all know it’s relatively new so it’s
hard to make these
rounded action decisions without having
so much at your disposal on research and
that doesn’t mean that every
conventional structured product uh
research is always 100% correct it’s
just more so more so that the track
record is there for people to look into
a little bit more accessibly versus
knowing what to search for when it comes
to the REITs crypto or even these
smaller interest based sneakers for
example I was into sneakers in junior
high but I can’t tell you right now what
to look for for a resale value on your
Jordan 11s that may be in the back of
your parents closet I’m not sure but
that those are all really good points to
think about if you’re deciding
hey is this something I actually want to
put money into which kind of leads me to
my next question determining how the
investment is right for the user or the
consumer I guess in this case you know
are there certain taxes on these
Investments That a consumer might say oh
you know what that’s not really for me
that bill may be too high or the risk of
it going high or low and then the bill
on the Taxation and the security or the
investment itself won’t work with my
budget right you know know it it’s
really interesting that you mentioned
like group thinking kind of all the
different ways in which we’re sometimes
insulated in the knowledge that we have
about these things and so actually based
on our study we developed an exercise to
help investors take a step back and
determine if it’s right for them so the
first step that we actually have people
take is just to evaluate how much do you
know about the alternative investment
you’re interested in like do you know
what the tax structure is do you know
what the tax benefits are or aren’t um
and so have people take a step back and
say well have I just heard of it or
could I pick a definition out on a list
and if you can’t even Define it for
yourself if I can’t you know say Hey you
know tell me tell me what cryptocurrency
is and you can’t really tell me you know
we encourage you to kind of hold off
until you know more about the product
and when you’re holding off on that you
want to take time to learn more from
trusted sources and finding out about
tax information is really important
because I think it’s something everybody
should always assume is that if you’re
making money it’s going to be taxed in
some way and so you know some alts may
not have the same tax benefits as
conventional Investments or they might
have different ones and so this comes
back to ensuring that you know what
you’re investing in always take time to
research what taxes you’re going to have
to pay and when you’re going to have to
pay them after that right so okay I get
it I feel pretty confident now I took my
time I read the as many sources as I
could and I know how the taxes are going
to work for my investment I’m ready to
go on to the next step and so our
exercise then says well okay okay so
you’ve taken the time to figure this out
now I want you to sit down and think
about what your motivations are for this
investment are you just interested in
the currently hot returns or are you
looking at motivations like the tax
benefits associated with them or the
diversification they bring your
portfolio so once you’ve thought about
your motivations you should sit down and
write out how that motivation fits into
your long-term financial goals you know
something that we always encourage um on
our behavioral insights team is on
morning stars for people to really treat
their financial goals as their North
Star in their investing Journey because
a lot of times being able to come back
to the thing that really matters is
going to help you avoid a lot of those
common mistakes that people tend to make
when things are exciting or scary or
just um confusing like alternative
Investments can be so for example say
that my goal is to get enough money for
a down payment for a house in a couple
years and I want to invest in Bitcoin
because the returns are off the chart
and that sounds really great to me but
we do know that Bitcoin can be quite
volatile and if I did something like
invest my down payment money in Bitcoin
in like 2021 when it was really hot and
went to pull it out in 2023 when it was
not so hot I’d be left with only a
little bit of my original investment
because of that volatility so here we
see that the returns May not be a good
motivation given the time frame we’re
looking at for my goal so instead some
motivations that might be good in this
situation is you know finding an
investment that has good liquidity so I
can pull out my money when I need it
because I found the perfect house or
something that yields decent dividend so
I can you know beat inflation while I’m
waiting for that perfect house to show
up this might lead you to be like okay
maybe this alternative asset isn’t right
for me and this one is or it might be
well maybe an conventional investment is
right or even a high yield savings
account I think just because you’re
interested in an all doesn’t mean that
you have to do it once you’ve started to
do the research keep an open mind the
last step that we encourage again comes
back to that point that you made earlier
of getting more information and ensuring
you’re not just listening to those who
are already thinking like you and that’s
to broaden your perspective so the last
thing we say is that people tend to like
to read things that we already agree
with it’s called confirmation bias and
it’s really nice and sometimes it can
feel really good but not when you’re
working with your finances you want to
make sure you’re doing the right thing
here so in this situation we encourage
you to seek out three sources that
actually disagree with your investment
decision so say that I went through all
the trouble of learning about reats and
how they function and then I’m like okay
the align the motivation here aligns
with my financial goal so reads look
great to me my next step is then to find
people who are actually talking about
why they’re not so great right now and
that final step is going to ensure that
you have a well-rounded grasp on the the
decision before you actually make the
plunge into that
investment that’s a really good point
actually I’ve never thought about that
from a financial Viewpoint in college I
remember doing research papers and some
of the critical thinking exercises we’re
finding something with an opposing view
because then it makes you think about it
from a different perspective potentially
refine or change your Viewpoint it’s
kind of like a debate with yourself in a
way and uh with finances you’re right
because when it’s gone it’s gone for the
most part the house down payment is a
great example if you put it in at 60 and
you come back for it hoping that it’s 60
and it’s 15 that is a hard pill to
swallow especially if you’re looking to
put a roof over your head so it’s
important to understand the taxation
side of it this is kind of um I guess
you could say the final step before the
Finish Line because this matters the
most what regulations are around the
alternative Investments is it going to
keep certain people out is it going to
make certain people not want to enter
the pool of investment because of the
potential red tape what does that look
like yeah so on a whole actually you
know alternative Investments tend to be
less regulated than conventional forms
of Investments and for some people this
is attractive like you can think of a
number of people who are very interested
in cryptocurrency because it isn’t
regulated by a centralized government
but on the other hand this means that
you really need to do your own research
and i’msure you understand what’s really
going on with an investment opportunity
because that lack of Regulation also you
know opens the door for people to scam
other people so you want to make sure
that you’re really taking the time to
understand what the regulations or lack
thereof mean for you and I think that
something that we’ve talked about a lot
is um like that there’s a lot to
consider here and and you’re going to
have to consider those same things over
and over again for each form of an
alternative investment because they’re
all different and so you might be
thinking that this sounds pretty complex
and that’s because it it kind of is and
alternative Investments aren’t
necessarily going to be right for every
investor at any given point in time
especially for those new to investing
and so if you are really keen on this
and you’re noticing that it’s really
complex some people might benefit from
talking to a financial adviser before
making that leap into alternative
Investments because there is so much
complexity going going on and there’s so
much research associated with really
understanding them and as you pointed
out it’s not as simple as oh I can just
look at you know how this stock has
performed for the past hundred years you
have to really kind of dig sometimes to
understand what you’re getting invested
in so I would say though like regardless
it’s important to slow down and consider
how these Investments work with your you
know current needs and also align with
your goals I mean you put it right in
the bullet points make sure it fits you
make sure it hit hits your goals make
sure that you know you give yourself a
Viewpoint that helps and hurts you for a
moment to see what’s worth it for you
but this was great thank you for joining
us Danielle yeah thank you for having me
I I loved getting to hear your
perspective on these things yeah this
was great so as always listeners can
learn more about an array of financial
topics for free at ibkr campus.com
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necessary seek professional advice
alternative Investments can be highly a
liquid are speculative and may not be
suitable for all investors investing in
alternative Investments is only intended
for experienced and sophisticated
investors who have a high-risk tolerance
investors should carefully review and
consider potential risks before
investing
significant risks may include but are
not limited to the loss of all or a
portion of an investment due to leverage
lack of liquidity volatility of returns
restrictions on transferring of
interests in a fund lower
diversification complex tax structures
reduced regulation and higher fees the
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IB bk.com
Conventional investments are always in the spotlight, but what about the alternative ones? How are investments in art, real estate, and other assets helpful in building your wealth? Danielle Labotka, Ph.D., Behavioral scientist for Morningstar joins Cassidy Clement, IBKR’s Senior Manager of SEO and Content to discuss.
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Disclosure: Alternative Investments
Alternative investments can be highly illiquid, are speculative and may not be suitable for all investors. Investing in Alternative investments is only intended for experienced and sophisticated investors who have a high risk tolerance. Investors should carefully review and consider potential risks before investing. Significant risks may include but are not limited to the loss of all or a portion of an investment due to leverage; lack of liquidity; volatility of returns; restrictions on transferring of interests in a fund; lower diversification; complex tax structures; reduced regulation and higher fees.
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