People who are looking to save for retirement are increasingly looking outside the traditional sources of investment and finding alternative ways of saving money. Although stocks and bonds remain popular investment sources, people are finding more and more ways to balance out their retirement portfolios by including alternative assets in them.
In this article, we will describe various alternative assets and the benefits that they can provide to retirement portfolios. We will also discuss the advantages of diversification in general. Finally, we will cover some of the risks involved in alternative assets so that potential investors know what to look for.
Maintaining Good Financial Health During Working Years
Maintaining good financial health during your working years is essential for securing a stable foundation for your future. This includes diversifying your investment portfolio to include alternative assets, which can contribute to long-term financial stability. Alongside this, managing your finances effectively allows you to pay off debts efficiently and concentrate on broader financial goals. Lowering your monthly expenses, including insurance costs, can free up resources for investment opportunities.
Developing solid financial principles extends beyond investing; it also encompasses optimizing expenses such as housing and utility bills, as well as groceries and other everyday costs. Taking the time to eliminate unnecessary expenses will help you not only save, but maintain a better credit score and be in a better position to put your money into investing for the future.
Benefits of Alternative Investments in Retirement
There are numerous benefits to be gained from including alternative investments in your retirement portfolio. In the sections below, we will provide an overview of what these benefits are.
Diversification Benefits
Diversifying your investment portfolio is essential because of the risk involved in relying solely upon the stock market as a source of investment. Stock prices can be unexpectedly volatile, and the sudden loss of value in a stock price can potentially wipe out a person’s savings if they don’t take the time to diversify. When you include stable assets along with riskier ones, you have greater assurance that your overall portfolio value won’t fluctuate too much.
Potential for Uncorrelated Returns
One of the advantages of alternative investments is that they are uncorrelated to the stock market. If the stock market experiences a sudden loss, investments that are not connected to it are more likely to retain their value. And while stocks can have varying degrees of volatility, it is also a good idea to include assets that are not connected to the stock market at all.
Alternative investments can also have some degree of volatility, but they are good hedges against the vagaries of the stock market because they fluctuate according to different factors. By including alternative assets in your portfolio, you are less likely to experience losses of both them and traditional stocks at the same time.
Income Generation Opportunities
Before delving into investments, it’s crucial to pinpoint exactly how much you’ll need to retire. Take the time to calculate what you expect to receive from Social Security and any other assets you have, and then you will be in a better position to determine how much more you should aim for with new investments.
With certain kinds of alternative investments, you can actually make extra income even before you retire. Some investments offer passive income sources in the form of dividends, royalties, or rent.
Types of Alternative Investments
In the sections below, we will take a look at several different kinds of alternative investments and discuss the benefits and risks involved in each of them.
Real Estate
There are different ways that you can invest in real estate, including:
- Buying residential property and renting it out. This is generally a stable investment, unless you end up spending more time and money on maintenance than you get in return from rent. You should look to buy in a high-rent area.
- Investing in a real estate investment trust (REIT), which is a corporation that buys commercial property and in which investors become shareholders. Investing in REITs can be a good way to increase your stocks and possibly earn dividends, but you will have to follow their value over time.
- Investing in a real estate investment group (REIG), which is a group that buys residential property and sells units to investors. REIGs usually cost more to invest in, but can provide greater returns.
Commodities
Some commodities are considered stable investments. Popular choices include precious metals, agricultural products, and oil. While commodities such as oil can be subject to the vagaries of the market, precious metals tend to be more stable.
The stability of precious metals, particularly gold, comes from their long history as hedges against economic turbulence. Gold bars, for instance, are highly sought after by investors looking to diversify their portfolios with a tangible asset. Their inherent value and physical nature make them less susceptible to digital risks and market fluctuations, offering a sense of security in uncertain economic times.
Private Equity
Private equity is something that is only peripherally considered “alternative” as it is connected to the stock market. When you invest in private equity, you are investing in a refined branch of stock investments. It involves buying shares of companies that aren’t traded on the public markets. Private equity is generally less liquid than traditional stocks, but can potentially offer higher returns.
Cryptocurrencies
Digital asset investment has been on the rise for several years. Although the cryptocurrency market does tend to fluctuate, people are gaining confidence in it as more regulations are being put in place every year.
There are several types of digital investments that investors can make. In addition to cryptocurrencies themselves (including Bitcoin, Ethereum, and others), the ownership of NFTs is becoming increasingly popular. NFTs, or non-fungible tokens, can represent any number of things, from art to real estate.
Another option is to invest in businesses that develop and implement blockchain technology. Investing in this technology could give you the opportunity to be part of the system that distributes this technology to many different types of businesses.
Risks and Challenges
For all the benefits that alternative investments provide, there are some risks and challenges that you should take into consideration before investing in them.
Lack of Liquidity
One of the disadvantages of alternative investments is that they are not very liquid. When you invest in the stock market, you can usually sell your stocks whenever you want. With alternative investments, however, you often have to leave your assets for anywhere from 3-10 years (depending on how long it takes them to reach maturity) before you can make withdrawals.
Complexity and Understanding Barriers
Another potential challenge with alternative investments is that they tend to be more complex than meets the eye. While this can also be an advantage, you should take the time to research any alternative investment before you put money into it. Alternative investments might have unusual features that are not obvious at first.
If the issuer of an alternative investment declares bankruptcy, for example, you should know whether or not there is a safety net for investors. It can also be challenging to determine the true value of assets that don’t have fixed prices on the stock market. For these reasons you should research any potential purchases carefully in advance.
Regulatory Considerations
There are also regulatory considerations to keep in mind. While the stock market has been established for some time and is now reasonably regulated, alternative investments aren’t necessarily. What this means for investors is that issuers can take liberties with the way they govern their assets and not be accountable for them legally.
More regulations are being put in place recently for certain kinds of alternative investments, such as cryptocurrency. However, you should always be cautious and investigate any alternative investments before you put money into them.
Return-Risk Trade Off
Some investments are more reliable than others, offering a sense of stability to your portfolio that, while typically yielding lower returns, reduces your overall risk. On the flip side, higher-risk investments can lead to greater rewards, often experiencing significant growth that can boost your financial prospects. Balancing these elements is key to smart investing. Including diverse assets like stocks, bonds, alternative investments, and even strategic financial tools such as life insurance, can provide a multifaceted approach to safeguarding and growing your financial future. By exploring options from various life insurance companies, you’re adding another layer of diversification and security, ensuring your portfolio is well-equipped to handle both market fluctuations and personal contingencies.
Conclusion
Alternative investments can be a great way to balance out a portfolio and give yourself some much-needed stability for your retirement. Different types of alternative investments are increasing in popularity and are becoming more standardized every year. There are some considerations to keep in mind, though, so be sure to familiarize yourself with the conditions and risk levels of each of your potential assets before you buy.