Investors are good at buying. Not so much when selling. They buy with excitement, lose interest over time, and the next thing you know, they’re left with some dogs that just won’t hunt. Several real estate firms are touting the strength of their portfolio and how it is a great entry point. But what about the stuff selling for pennies on the dollar stuck in the mix? It’s not so easy getting the money back. These are often called “alternative” investments. The alternative part is that they aren’t very liquid, so when you want to sell, sometimes it’s not easy. Jason Zweig reports in The Wall Street Journal:
If your financial advisers haven’t yet tried to sell you any “alternative” investments, they might soon. Flogging these assets that aren’t listed on a stock exchange—bundles of real estate, buyout deals, private debt and so on—is one of Wall Street’s biggest obsessions.
Getting in is easier than ever. But I doubt most buyers understand how hard getting out can be.
Just three categories of alternatives—nontraded real-estate investment trusts and business development companies, plus interval funds that permit you to withdraw a portion of your money only a few times a year—raised a combined $55.8 billion in 2023. That was up from $26 billion a decade earlier, according to Blue Vault, a research firm in Cumming, Ga.
The idea is that when you lock your money up for months or years, you’re less likely to panic in a downturn, enabling the managers to amass a portfolio that will pay off in the long run.
That bumps up against a basic law of financial physics: Eliminating one risk creates another.
An investment that doesn’t trade may have some advantages, but once you buy it, how do you sell it? How deep a haircut, or discount from the reported price, will you take?
Many funds have so far been able to cash out investors at what seems like a fair price. Many haven’t.
It’s common for alternative funds to buy back some of their own stock periodically—but if too many other people tender their shares, you might end up too far back in the line to be bought out. That happened this year at Starwood Real Estate Income Trust. It also did for part of 2022 and 2023 at Blackstone Real Estate Income Trust.
Action Line: You don’t want to get caught at the back of the line. The easiest way to do that is to avoid getting into a line in the first place. Mind the liquidity of your investments. When you want help, I’m here. In the meantime, please click here to subscribe to my free monthly Survive & Thrive letter.
