So are you set for life with your current retirement portfolio? Can you further diversify your investments to increase your returns potentially?
If so, alternative assets like real estate investment, trusts, commodities, and private equity funds may be the way to go.
Investing in alternative assets with your retirement account can help build long-term wealth and diversify your portfolio beyond stock, bonds, and mutual funds.
But what are your options? How do you select the best alternative assets to invest in? What are the inherent risks and potential benefits of investing in alternative investments with a retirement account?
Let’s explore the answers to these questions together!
Types of Alternative Assets for Retirement Accounts
By investing in various assets, you can distribute the risk of your portfolio. In other words, if one investment performs poorly, other assets may still perform well.
Alternative assets are excellent at this as they often offer higher returns than traditional assets like stocks, bonds, and mutual funds.
Luckily, you have various excellent options when investing in alternative assets with your retirement account. Here are some:
- Real Estate: Allocating money in real estate with a retirement account can provide an excellent source of passive income. Real estate investment can include rental, commercial, and real estate investment trusts (REITs).
Investing in real estate can offer a hedge against inflation. Moreover, with careful selection and management, real estate investments can provide long-term appreciation.
- Tip: Research the market thoroughly and select a property with an excellent rental history or potential for appreciation. It’s best to have a trusted property manager handle day-to-day operations, such as rent collection and maintenance.
- Trusts: Trusts can include a wide range of assets, including stocks, bonds, and real estate. Unlike these assets, trusts don’t represent direct ownership. Instead, as a beneficiary of the trust, you receive the benefits of the assets held in that trust, such as dividends, interest, or rental income.
One of the benefits of investing in trusts is that they can provide tax advantages to investors. For example, a charitable trust can allow an investor to donate to a charity while receiving a tax deduction.
- Tip: Before investing in trusts, ensure the fees, which can range from 0.5% to 1% annually, are reasonable. You must also review the trust’s objectives and performance history.
- Commodities: Putting money into assets like precious metals and oil can be a valuable addition to a retirement portfolio as they can provide a hedge against inflation and market volatility.
However, commodities can also be volatile, and you should use them sparingly. For instance, the record-high oil prices of nearly $150 per barrel in 2008 dropped significantly to around $40 per barrel within the same year.
- Tip: Consider investing in a commodity ETF (exchange-traded fund) or mutual fund rather than directly investing in a commodity. Similar to investing in alternative assets, doing so can help distribute the risk of your portfolio.
- Private equity funds: Unlike trusts, private equity funds are investments in non-publicly traded private companies rather than assets.
The upside of investing in private equity funds is that it offers higher return potential than investing in other alternative assets. However, high-reward investments are often high-risk.
Moreover, private equity funds often come with management and performance-based fees. Due to the higher risk involved, these fees are often higher than those of trusts.
- Tip: Before investing, ensure you’re comfortable with the risk level associated with private equity funds. It’s crucial to review the funds’ track record and investment objectives. It would help to choose a strong fund management team with a solid investment strategy.
The Upsides of Investing in Alternative Assets With a Retirement Account
- Diversification: Putting money into alternative assets helps diversify your portfolio. Assets that have little correlation to the stock market can mitigate the risk of your portfolio and may reduce losses during a market downturn.
- Higher Return Potential: Alternative assets are often less liquid, deterring some investors and creating a higher demand. Higher demand can increase the value of alternative investments, leading to higher returns for investors willing to invest in them.
- Inflation Hedge: A better hedge against inflation means the value of your money won’t depreciate as much due to inflation. Alternative assets like real estate and commodities tend to increase in value during inflation, which helps offset the loss in your money’s purchasing power.
- Tax Benefits: Depending on the type of asset and the retirement account you use, you may qualify for tax benefits. For example, investing in real estate through a self-directed IRA (individual retirement account) can provide tax-deferred or tax-free growth.
The Downsides of Investing in Alternative Assets With a Retirement Account
- Higher Fees: Many alternative assets come with higher fees than traditional investments. For instance, mutual funds typically charge an annual management fee that ranges from 0.10% to 2%. On the other hand, the private equity funds’ management fee is around 2%. However, fees also include performance fees that are typically 20%, which can eat into your returns.
- Illiquidity: Alternative assets like real estate and private equity funds can be less liquid than traditional investments. If you intend to use your funds to diversify your portfolio, it might be difficult to sell your existing assets without incurring a loss.
- Complexity: Investing in alternative assets may require you to develop more knowledge and expertise to manage these assets effectively. In real estate, you must know the ins and outs of the market of the real estate property you’re investing in.
- Significant Risks: Unlike stocks or bonds, which you can easily purchase and get rid of on the stock market, you can’t easily tap into alternative investments without a significant loss of value. There is a possibility that you may lose some or all of your investments if you don’t keep an eye on the market.