Historically, retirement account investing was limited to traditional investing structures. These include stocks, bonds, funds, and ETFs. However, in the 1980’s real estate started to gain popularity as a new retirement account investment. Today, there is a whole world of alternative assets you can purchase with your self-directed retirement account, including the Solo 401k.
Popular alternative assets to consider include real estate, gold & silver, cryptocurrency, tax lien investing, promissory and mortgage notes, private placements, and real estate crowdfunding. There are several reasons to consider adding alternative assets to your retirement account portfolio. Let’s cover some of them here.
Better Returns
With the boom and bust cycles of the stock market, many investors find they can get better returns by investing in alternative assets. Stock market investing has compound annual growth rate of 6.77% for the last 10 years. Meanwhile, some real estate investors are averaging 12-14% per year with their rental properties. Bitcoin’s CAGR is 309.46% since 2011. With those numbers, it’s easy to understand how some investors are drawn toward alternative assets to round out their portfolio. Further, investing in uncorrelated assets can mean you are not exposed to market downturns as you would be in an all stock/bond portfolio.
More Diversification, Less Risk
Increasing asset types can also add diversification to a portfolio. A more diversified portfolio is generally considered to have less risk, because your funds are spread out over more assets. This is attractive to an investor who is looking to grow wealth over the long term. Diversification and appropriate risk reduction are keys to a strong portfolio.
More Control Over the Investments
With stock market investing, you have zero control over those assets. You are not the CEO of Facebook, Apple, Amazon, Netflix, or Google (FAANG). You do not control their earnings reports, which means you cannot control market sentiment or stock price. Similarly, you do not control the Fed and their decision on interest rates. Additionally, the government probably doesn’t consult with you on 10-year treasury yield bond. In short, there’s a lot to traditional asset investing you don’t control. When you don’t control the inputs, chances are you don’t control the outputs either.
On the other hand, with alternative assets there are a lot of aspects of the deals you can control. For example, with real estate investing you can choose the investment deals with razor precision. You can determine what types of properties you want to buy and where. Further, you are able to select a property manager to screen and place good tenants. You can decide to have a contractor rehab the property to make it more appealing to potential tenants. These improvements can bring in higher rents. This affords you more income and cash flow in the property.
In other words, many more aspects of the investment are under your direct control. This control aspect is incredibly appealing to investors when considering alternative assets for the retirement plan portfolio.
Invest in Deals with Friends
Finally, one attractive aspect to investing in alternative assets with your Solo 401k is the ability to partner on deals. With traditional investing, you can’t buy a piece of a stock. You and your cousin cannot split ownership of a mutual fund investment. You either buy all or none of the asset.
In contrast, you and your friends, colleagues, or even some family can partner on alternative asset deals together. It’s even possible for your Solo 401k and a friend’s Solo 401k to invest together. Partnering is especially possible with real estate investing. Make sure you review the prohibited transaction rules and don’t do any deals with disqualified persons.
All investing includes risk. As an investor, always do your research and due diligence before completing an investment, especially with your retirement funds. However, you may find your overall bottom line can improve with the inclusion of alternative assets in your Solo 401k plan. Consider alternatives such as real estate, crypto, tax liens and precious metals. These alternative assets can provide diversification, a hedge against inflation, and exposure to uncorrelated assets.
