Most retirement portfolios consist of index funds, mutual funds, and bonds. When nearing retirement, it’s a smart idea to invest more conservatively as you may need to withdraw money in the short-term. Since alternative investments have a reputation for being volatile and risky, investors tend to steer clear of alternative investments in their retirement portfolios.
But what about those who aren’t quite nearing retirement yet, but are building their retirement portfolios? Unfortunately, many traditional retirement savings accounts such as 401(k)s are limited in what you can invest in. However, Individual Retirement Accounts (IRAs) do allow for certain alternative investment options, but there are limitations.
Here’s what you need to know about incorporating alternative investments into your retirement savings plan.
What Are Alternative Investments?
Alternative investments fall outside of the traditional stocks, bonds, and mutual funds investments. Popular alternative investments include, but are not limited to:
- Private equity
- Limited partnerships
- Venture capital
- Real estate investment trusts (REITs)
- Precious metals
- Hedge funds
- Tax lien certificates
Alternative investments fall into two broad classes, namely private and public investments. REITs, for example, are a common public alternative investment.
Why to Consider Alts in Your Retirement Portfolio
1. Non-Correlation to the Stock Market
Any investor in the stock market for long enough will experience some big wins and losses. Diversifying your portfolio is key to surviving times of volatility. Since they’re uncorrelated to the stock market, alternative investments provide a hedge of protection against volatility.
2. Direct Ownership
When you buy most public investments, you get a paper asset with a discounted value and expected earnings in the future. You don’t truly own anything in this case. But with certain alternative investments, you are the sole owner of the asset.
Collectibles and real estate are examples of alternative assets the investor physicalls owns. Examples of collectibles include fine wine, paintings, jewelry, and more.
3. Strong returns
A survey by iCapital Network found that attractive returns and diversification are two leading reasons for investing in alternatives. Private equity, for example, is an asset class that has outperformed the S&P 500 for more than a decade.
Of course, returns are never guaranteed, and just like any investment, there is risk. It’s important to perform due diligence before making any investment.
How to Incorporate Alts Into Your Retirement Portfolio
Investor demand for alternative investments is on the rise. Statistics show that global alternative assets will rise to $13.6 trillion by 2020.
Many investors are increasingly choosing to roll over part of the 401(k) or IRA into a self-directed IRA. Doing so enables them to have more control over their long-term investments. With this type of IRA, investors can incorporate certain alternative assets. A self-directed IRA also leaves more room for investors to capitalize on the assets they feel have the greatest long-term gains.
It’s important to do your research before choosing the best retirement accounts for you, though, and what rolling over a 401(k) to an IRA entails.