The 3 Stages of Investing: How I’ve Learned to Balance Traditional With Alternative

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
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Recently, I attended a conference for family offices, which are basically private wealth management firms typically having over $200 million in assets under management. While I was there, a discussion about the percentage of alternative investments advisors recommend their clients have in their portfolio caught my attention since, as a fund manager of residential mortgages, my note funds are considered an alternative investment vehicle.

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For most of us on BiggerPockets, our biggest investments are our businesses and our real estate holdings, which are both considered “alternative.”

For many, though, alternative investment options may not even be on the radar. Rather, they tend to invest in more traditional types of investments like stocks.

(By the way, if you’re curious, most advisors recommend that their clients have less than 10 percent of their portfolio in alternative investments like real estate or private placement funds.)

But this conversation got me thinking about my own path as an investor, and I realized that I’ve gone through three stages as an investor.


Stage #1: Traditional Investor

This reminds me of myself at a much younger age. After I graduated from college and was working a corporate America-type of job, I had a financial advisor whose only recommendation revolved around traditional investments (stocks and bonds), managed through his company, of course.

My traditional advisor considered everything outside his world an alternative investment, including real estate and notes. It almost seemed like anything that he couldn’t earn a fee on or that required more paperwork was considered “alternative,” shorthand for “not for you.”

Related: 5 Alternative Exit Strategies to Liquidate Properties Fast

I followed his advice and was seeing good results at first, but after time, I was no longer getting positive outcomes. Then, I started thinking about a concept he used, diversification, and started to take that concept seriously. That’s really what led me to real estate.

Stage #2: Alternative Investor

It wasn’t long before I realized that if I was I going to invest, I wanted to be in assets with collateral (real estate and notes) or in something that I’m more familiar with (like my business).

Over the years, I’ve come to believe that the biggest differences between traditional and alternative have more to do with control and the collateral behind the investment (or lack thereof). After all, as Warren Buffett said, “Invest in what you know.”

In my case, I quickly switched my investing model from giving up control to taking it back. My percentage of alternatives jumped up to about 90 percent at this point, with only 10 percent in traditional vehicles like the stock market.

I get that if you’re super wealthy like a typical family office, it kind of makes sense that you have to give up some control. Safety and security may take priority over higher returns, especially if you’re more concerned with asset protection than yield. Plus, with more capital, it may be harder to deploy it all.

But for me, the game was on. I went all in for real estate (and later, private lending and notes).


Stage #3: Alternative + Traditional Investor

After growing my portfolio size quite a bit in the last few years, I’m starting to lean back in the other direction—increasing my percentage of traditional investments. Of course, I’m still investing in alternatives, but with more investment dollars to deploy, I just don’t have all the bandwidth to deploy it all myself.

The difference this time is not only my knowledge but also the type of expert team I’ve developed to help me pull this off. Today, I feel much more comfortable with my traditional investments and the way I handle risk.

For example, years ago I use to invest through a broker and park my money in the market. Today, I invest in the market for as short as one to two minutes, a few times a month. The majority of the time, I remain in cash and out of the market. My exposure and risk is very limited, and it’s also more defined and controlled.

Related: 5 Areas to Study to Know if You Bought a Good Real Estate Note Deal

What Stage Are You in?

As I look back, my percentage of traditional investment dollars went from a large percentage when I was starting out, to a small percentage as I went all-in as a real estate investor and entrepreneur, to a more moderate percentage of my overall portfolio as I’m staring retirement in the face.

If you’re like me, the way you view risk may change as you get older, or you may start to prefer more passive investments. It’s all about your time horizon, your knowledge, and ultimately, your preferences.

What many don’t realize is that you can diversify among alternative investments just as you can with traditional by investing in different asset classes. Anything from private placements, precious metals, mortgages, and tax liens, to any type of real estate can be considered alternative.

So, what percentage of your portfolio is in alternative investments versus traditional, and why? How do you maintain control and manage risk?

Let’s discuss below!

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.

    Kris Patel Investor from Arroyo Grande, California
    Replied over 2 years ago
    Like you 80% real estate n happy
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 2 years ago
    Glad to hear you found what works for you Kris! Best of luck.
    Stephen S. Wholesaler from Holiday, Florida
    Replied over 2 years ago
    1. People who manage Your money are primarily interested in Their income – yours is completely secondary to yours. 2. “diversification” is asset manger shorthand for “I don’t know what I’m doing and always want to have something else besides my losses to direct your attention to.” The concept of diversification is stupid. You don’t need diversification – you need better investment choices.
    Bryan O. Specialist from Littleton, CO
    Replied over 2 years ago
    Another point to remember about most of the “financial advisers” out there: many of them have no fiduciary duty to you whatsoever. They are the equivalent of a car salesman at a car lot. They will try and sell you what they think fits their needs, but only from their lot. Anything else should be disregarded as risky, alternate, or not a good play.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 2 years ago
    Steve, Good point. I agree that many advisors steer folks away from alternative investments and use words like ‘diversification’ to deploy your capital among different traditional investments. However, one can diversify among alternative investments too, without necessarily sacrificing yield. It’s all about how you mitigate risk. Also, while some advisors do have their client’s best interest at heart, I do agree that the person who will care the most about your money is you. Best, Dave
    Audrey Ezeh Real Estate Investor from Las Cruces, New Mexico
    Replied over 2 years ago
    I’m in stage 2…done well with traditional investing but diversification and more control led me here. I anticipate I’ll be tilted heavily toward RE sooner than later but I’m not willing to move money out of traditional investments to do it though. I’m getting really great returns on my positions?. Great post!
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 2 years ago
    Thank you for sharing Audrey! Certainly traditional investments can still be lucrative for some investors. If you do want to start investing in more real estate, keep in mind that you don’t necessarily need to use your own capital. What type of real estate are you interested in?
    Christopher Smith Investor from brentwood, california
    Replied over 2 years ago
    I was a traditional investor for many years and did quite well (stock & bonds). In that regard, I never really intended to invest in real estate because it seemed either to risky and ill-liquid, or just required too much time and specialized knowledge. However, along came the 2008 housing crises and incredible bargains were literally everywhere, so I dove in head first and its been much better than I had ever anticipated real estate could be. Of course my timing was very propitious, but as they say, I would rather be lucky than good. I have property managers that take care of most of the heavy lifting and unpleasantries so for me its been for the most part a walk in the sun. I even feel after having been at this now for a few years, I might even explore a more active role beyond holding a generally passive portfolio of rental properties. I doubt I will ever do this full time (I still work a regular job), but who knows, perhaps lighting will strike a second time.
    Ahmed Hamza Investor from Saint Clair Shores, Michigan
    Replied over 2 years ago
    Great Read! Thank you!
    Replied over 2 years ago
    I don\’t see real estate as an \”alternative\” investment. I see it as one of the big three asset classes (along with stocks and bonds) whether you invest in REITs, syndicated shares, or direct full ownership. I agree the way to go is to use both stocks (preferably via index funds inside retirement accounts) and real estate in your portfolio. Can\’t quite figure out why people think you should exclude one of those.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 2 years ago
    Hi John, I agree – often people think they need to choose only one path for wealth creation, but that’s really not the case. Personally, I tend to focus on the diversification and synergy between investing in businesses, real estate, and paper assets. Thanks for sharing! Dave
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied over 2 years ago
    Thanks Gohar!