In today’s economic climate, retirement is top of mind for many investors. Perhaps you’re trying to figure out how to invest so that you can retire comfortably.
Alternative assets like real estate and private equity may provide diversification that can help reduce your exposure to just one asset class. These types of alternative assets aren’t always as liquid or easy to access as stocks, bonds, or cash but they hold the potential to be much more lucrative in the long run.
Whether you’re already retired and trying to find ways to make your retirement last longer, or preparing for retirement, adding alternative assets to your portfolio is a great way to secure your future and diversify your portfolio. The best part is that there are different types of alternative assets for different types of investors; whether you’re risk-averse or risk-seeking, there’s something for everyone.
What Are Alternative Assets?
Alternative assets are investments that are not stocks, bonds, or cash. Real estate, commodities, cryptocurrency, private equity & private debt, angel investing, crowdfunding, venture capital investing and hedge funds are all examples of alternative assets. While these types of investments may be higher risk and less liquid than stocks and bonds, they have the potential to earn a higher return over time and provide diversification in your portfolio so you aren’t exposed to just one asset class.
So why are these asset called “alternatives”? Because truthfully, stocks and bonds have been the “standard” investment for decades. These traditional instruments are easy to get into and out of, they’re highly liquid, and highly recognizable and accepted as “normal” investments. But in these uncertain times, is “normal” really the way to go to get better investment performance?
It’s important to remember that you can’t always liquidate alternatives assets at the drop of a hat and convert them into cash. Instead, you may have to hold certain assets for some time until you can sell them at a profit. However, if you are willing to wait, these investments have the potential to pay off significantly more than just holding traditional stock, bonds, and funds in your portfolio.
1) Real Estate Investment Trusts (REITs)
Real estate, especially residential property, is usually seen as an alternative asset, but it can also be a part of a more conservative portfolio. REITs, a type of investment fund that buys and operates real estate, can be a great addition to a more conservative IRA or 401k plan.
REITs are still a securitized instrument (meaning you’re buying a piece of an instrument that holds multiple properties or types of real estate). However, this makes them diversified, meaning they hold many different properties, so they may not carry the same risk as investing in a single commercial real estate property.
REITs are relatively easy to access and liquid. They trade on public stock exchanges, so you can sell them whenever you want, although you may have to pay a penalty if you need to sell before a certain date. You can choose between different types of REITs, depending on your risk tolerance. The more conservative types of REITs, such as utilities and telecommunications, are less risky than hotels and gaming. Utility companies, for example, are more reliable and less volatile than hotels. There are even short REITs, if you think the general outlook for real estate prices is dismal and want to be on those prices going down.
2) Private Equity and Hedge Funds
These types of alternative assets are more sophisticated than REITs. Private equity and hedge funds can be risky and illiquid, but the potential for high returns makes them a tempting choice for investors who can afford to take on higher risk. Several large investment firms, such as BlackRock, Franklin Templeton, and T. Rowe Price, manage private equity funds and hedge funds. There are also a plethora of private firms who offer funds.
You can find out more about these funds and how they operate on the firms’ websites. Keep in mind that these funds are reserved for accredited investors, also known as high-net-worth investors, so they aren’t accessible to everyone. Hedge funds are generally reserved for very wealthy investors who are looking for high-risk investments.
Commodities are another type of alternative asset. Commodities are raw materials such as gold, platinum, oil, natural gas, lumber, and other minerals that can be traded on the commodities exchange. They are often used as a hedge against inflation and as a source of insurance against a variety of economic and political events, such as a drop in the stock market or a rise in interest rates. You can also invest in a commodity-focused mutual fund or ETF.
This can be a great alternative asset for those with a higher appetite for risk. Commodities are high-risk investments, but they can have large payoffs if you can time the market correctly.
Bitcoin is another type of alternative asset. Bitcoin is a type of digital currency that is not controlled by any central bank or government, so it can be used as an investment. It has been around for over 10 years, but it has only recently become popular in the mainstream media. Bitcoin was created in 2008 and its value has grown exponentially over the past few years.
An advantage of investing in bitcoin is that it has low correlation with other assets, so it can be a powerful portfolio diversifier. The downside of investing in bitcoin though is that there are risks associated with the volatile price fluctuations, lack of liquidity and limited market depth (i.e., there are not many buyers as traditional stocks or bonds).
Cryptocurrencies are not regulated by central banks, so they are extremely volatile. They can see enormous gains one day and losses the next day. If you choose to invest in cryptocurrencies, you should only put a small portion of your portfolio into it – typically what is reserved for your high risk assets.
5) Limited Partnerships
A limited partnership is a type of investment where an investor contributes money to a business in exchange for a share of the profits. Limited partnerships are entities that have at least one general partner who manages the day-to-day operations and one or more limited partners who provide capital for the partnership. Limited partners have no responsibility for management, but they share in profits and losses based on their investment.
A limited partnership is a combination of debt and equity. The equity partner puts up the majority of the money needed to start the business, while the limited partner contributes a smaller amount to the business in exchange for a share of the profits.
Investing in limited partnerships is a great way to invest in real estate without the hassle of buying and selling property. This is known as an apartment syndication and can offer exposure to real estate outside of a REIT.
6) Other Alternative Assets
There are many other types of alternative assets. Other types of investments that fall into this category include real estate crowdfunding, peer-to-peer lending, and publicly traded limited partnerships. Real estate crowdfunding has become more common in recent years as an alternative asset. It allows investors to crowdsource funds to invest in real estate projects.
Publicly traded limited partnerships are another type of investment option. These partnerships are between two parties: an equity partner who provides the money and a limited partner who makes a cash contribution in exchange for a share of the profits. The equity partner puts up the money needed to start the business, while the limited partner gives the project capital in exchange for a share of the profits. Other types of alternative assets include commodities, gold, precious metals, and rare collectibles.
Investing in alternative assets may a good way to increase your retirement savings because of the diversification it provides. However, it is important to remember that these investments can be riskier than stocks and bonds. If you are willing to take on more risk, you will likely earn a higher return over time. If you’re considering adding alternative assets to your portfolio, make sure you understand the risks involved and that you have the necessary expertise to evaluate them.
Although some of these alternative assets may be more volatile than traditional stocks and bonds, they can offer the potential for higher returns. Including a mix of asset types in your retirement portfolio can help you weather market ups and downs and reach your long-term financial goals. Some other options to consider include real estate investment trusts, commodities, private funds and hedge funds, precious metals, and limited partnerships. Before making any changes to your retirement account, be sure to speak with a financial advisor to get personalized advice that takes into consideration your unique circumstances.
What alternative assets are you including in your portfolio?
I’m convinced the Fed will continue tightening until it “breaks” something. Many experts expect the Fed to then pivot, as they have done repeatedly in the past. My concern/question is what if they break something so big and so badly that regular money printing and lowering of rates is insufficient to turn things around? In which case, we have a world-wide economic collapse. Your thoughts please.
That is a serious concern of mine. I’m 65, retired and have been hemorrhaging losses in the traditional investments for 2 years now. I’m concerned my money will run out in retirement resulting in a lower standard of living.
Your concerns are completely valid, Keith. I think this is why so many investors have turned to alternatives – to reduce the correlation of the portfolio swings up and down. While no investment is perfect or risk-free (not even bonds), having exposure to different asset classes can help soften the blow. And I mean real diversification – not just holding different sectors of the same asset class (stocks)!
I’d agree with you here, Terry. There’s always a possibility the Fed strategy won’t work – the zero interest rate environment for the last decade coupled with runaway money printing/quantitative easing has created an “everything” bubble. Everyone was riding high on the hog while their asset prices went up, without truly understanding the underlying impact that sustained money printing could create.
My uncle recently decided to invest in a Precious Metals IRA, and he chose gold. I think it’s great that you can use commodities such as gold, platinum, oil, natural gas, lumber, and other minerals to invest in your future. Knowing that there is a wide variety of options out there when it comes to investing offers peace of mind.