Investing · August 04, 2022

Investment Trends Explained: Cryptocurrency, REITs and Sustainability

Your retirement accounts are probably packed with stocks, bonds and mutual funds—common securities that allow you to invest in a wide range of business and economic activities. But financial and social media are often abuzz with other investment trends, including cryptocurrencies like Bitcoin, real estate plays and purpose-driven sustainable investments.

Whether these types of investments are a good fit for you is a matter to discuss with your financial advisor. However, it pays to understand the buzz around each type of investment first.


Cryptocurrency

Cryptocurrency is defined as a digital or virtual currency designed to work as a medium of exchange. Transactions are verified and recorded in a decentralized system instead of a centralized authority, then recorded permanently and anonymously with technology known as blockchain. Cryptocurrency uses encryption to secure and verify transactions, as well as to control the creation of new units. There are several differences between cryptocurrency and conventional money, but the main characteristics that separate them are the decentralized and encrypted aspects of cryptocurrency.

While Bitcoin became the first decentralized cryptocurrency in 2008, only in recent years has it—and scores of other lesser-known cryptocurrency investments—attracted investor interest.

While 86% of Americans have heard of cryptocurrency, a Pew Research Center 2021 survey found that only 16% personally invested in, traded, or otherwise used cryptocurrency.

Some investors put money into cryptocurrency with the idea that these digital currencies wouldn't rise and fall with the stock market, notes Penn Nugent, CFP, Senior Manager Personal Portfolio Strategy Group for First Citizens Wealth Management.

"Early on, there was some belief that maybe the relationship between cryptocurrency and stocks was noncorrelated. When stocks went up, cryptocurrency wouldn't necessarily go up, and when stocks went down, it wouldn't necessarily go down," Nugent says. "That looks to be maybe not as true as people initially thought."

While Bitcoin is the largest cryptocurrency by market capitalization, there are thousands of others.

"There are so many options, and that's part of the challenge," says Isaac White, CFP, Senior Portfolio Strategist for First Citizens Bank.

Nugent notes that cryptocurrency investments are, by definition, speculative. White and Nugent often tell their clients that like any investment, people should think through their goals, timeline and appetite for risk before investing in cryptocurrency.

"Make sure you know what you're buying, when you're buying it and why you're buying it," White says. "What's your time horizon for this asset, and what's your willingness to deal with volatility?"

It's worth noting that just like any investment, buying and selling cryptocurrency can have tax implications and could lead to tax liabilities, which would be owed in US dollars, not cryptocurrency.

Real estate investments

Real estate investments have traditionally been thought of as a hedge against inflation because rental income often rises alongside consumer prices. Some investors may also be drawn to the idea of owning a physical asset they can see and touch—perhaps in a place where they live, vacation or want to retire.

Buying a rent-producing property comes with its own challenges, though, including financing, property maintenance and marketing to prospective renters.

As an alternative, purchasing shares of a real estate investment trust, or REIT, allows you to invest in real estate without the hassle of managing property yourself. It also makes real estate investing possible with much less money.

"Most people don't have $3.5 million to go buy a commercial piece of property," Nugent notes. "REITs are a fantastic way to take $1,000 and invest in real estate."

REITs are companies that own, manage or finance commercial real estate. They're similar to mutual funds because they typically own many real estate assets, spreading risk across a portfolio of properties. Profits are passed along to shareholders as dividends. Publicly traded REITs operate like mutual funds or stocks, so you can buy and sell shares on the open market and earn a profit based on the value of those shares.

Still, it's important to do your homework when considering REIT shares. First, White says, you'll need to determine if you want to include REITs as an asset class in your investment portfolio. If you do, then you'll need to decide which REIT or REITs to invest in.

Just as with other investment trends, you'll want to consider the characteristics of each REIT you're looking at with your advisor. If you're investing in more than one REIT, you'll also need to consider how diverse your overall real estate investments are. REITs often specialize in certain types of buildings, like apartment complexes, warehouses and commercial office buildings.

"What real estate is it investing in? Geographically, where is it? It's different buying property in Detroit versus a place like, perhaps, Jacksonville or Tampa, Florida," White says. "How long has the management team been together? Not all REITs are the same."

Sustainable investing

If you're looking for a different investment trend that matches your own beliefs, a growing number of individual and institutional investors are considering companies' environmental and social impact when they make investment decisions.

"I want to do good with my money," Nugent says some clients tell him. "I want to make sure that I'm being a good steward. But how do I do that?"

One approach to sustainable investing is environmental, social and governance, or ESG, investing, which uses those three factors to assess a company's sustainability.

According to AFLAC's 2019 Corporate Social Responsibility survey, 77% of consumers were motivated to purchase from companies committed to making the world a better place. The same survey found that 48% of investors decided not to invest in a company because of their position on an issue, while 38% said they've actually sold their shares because of a company's position.

The global accounting and consulting firm Deloitte forecasts that half of all professionally managed investment assets will be selected with ESG criteria in mind by 2024—up from about 29% in 2014. If you want to find a company's ESG report, ResponsibilityReports.com has a free searchable database of 10,412 such reports from 2,208 global companies.

The percentage of professionally managed assets selected with ESG criteria in mind is expected to increase from 29% in 2014 to 50% by 2024.

There are no set criteria for evaluating a company's ESG-related practices. Each investor must determine which standards are most important to them and then apply those standards to the market. That said, environmental factors could include a company's carbon footprint and other impacts on the environment, while social factors could reflect a company's activities in the areas of social welfare. Diversity, equity and inclusion often arise in this context, as does corporate philanthropy. And governance issues relate to how companies are governed, such as the level of independence a board of directors has within an organization.

Some investors, White notes, choose ESG investments because they align with their values or something important to them. He recalls one widowed client who was guided by her deceased husband's character.

"What was important to him was being a good person," White says. "She said, 'I want to invest in people who do good.'"

Choosing ESG stocks may alter your overall investment performance. In some market environments, White explains, some ESG-compliant companies may perform better or worse. Oil companies, for example, are unlikely to be considered environmentally friendly. So when oil prices rise, an ESG investor may lose out on those gains.

"There are certain market environments where ESG portfolios will outperform or underperform the general market," White says.

Looking to diversify?

If you're in a position where you have more disposable income—due to a raise, recent debt payoff or inheritance—and want to consider different types of investment trends you keep hearing about, talk with your financial advisor.

Whether your investment criteria are purely financial or other factors influence your decisions, a financial professional can help you make choices that align with your interests and values while helping you achieve your financial goals.


Learn more about cryptocurrency trends

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