Alternative investments can play an essential role in anyone’s portfolio, but for the average investor, they may seem too complex. Including alternative investments is a great way to increase diversification in your portfolio, but first you must understand what they are.
Types of alternative investments
Alternative investments are anything that doesn’t fit in the traditional categories like stocks, bonds or cash. Private equity, real estate, commodities like gold, bitcoin and other cryptocurrencies, hedge funds, and tangible assets are all considered to be alternative investments.
One of the reasons investors choose alternative investments is because they offer excellent diversification from stocks and bonds. Many alternative investments have a low correlation with stocks and bonds. That means if stocks and bonds go down, some alternative investments may offer protection for your retirement savings because they could increase in value.
For the average person saving for retirement, it’s a good idea to have a financial advisor go over the options with you. However, you should also educate yourself before your next appointment so you can have a good idea of what they are talking about when they mention alternative investments.
For example, do you know the difference between mutual funds and hedge funds? Mutual funds are regulated investment vehicles that anyone can invest in. On the other hand, hedge funds are private funds that only accredited investors can invest in. Additionally, hedge funds tend to use riskier strategies than mutual funds.
Private equity funds invest in companies that don’t trade on public stock exchanges. These funds can also participate in buyouts of public companies, which results in their stock being delisted from the stock exchange it was trading on.
Commodities are raw materials or agricultural products that can be bought and sold. Gold has received a lot of attention recently due to the COVID-19 pandemic. It’s considered a safe haven because gold prices tend to rise when other asset prices are falling.
Many investors choose to hold either physical gold in the form of bars or coins. Some prefer to invest in exchange-traded funds (ETFs) or individual retirement accounts (IRAs) that invest in gold. Other commodities include copper, silver, and other metals, oil, wheat, and coffee.
Including alternative investments in retirements savings
One thing to keep in mind if including alternative investments in retirement savings portfolio is to avoid high-risk investments. This is especially true the older you are. Younger savers can afford to be riskier with their investments because they have more time to save and make up for whatever they lose.
Something else you should keep in mind is that many alternative investments have a minimum required buy-in to be able to hold them. For example, private equity funds sometimes require a minimum $25 million investment to invest with them, although some require as little as $250,000, according to Investopedia.
Hedge funds often require a minimum investment of at least $1 million. Because so much money is needed to buy into certain alternative investments, they will be out of reach for many who are saving for retirement. However, that doesn’t mean all alternative investments will be out of the question.
Retirement savers who are looking for a safe haven might consider investing in gold, especially during difficult economic times. Ideally, the time to buy gold is while the economy is doing well because gold prices will be down.
Then when an event or recession shakes the market, gold prices will rise, carrying your retirement portfolio along with them. Since gold usually rises when other assets decline in value, it offers some level of protection from economic downturns. Another way to invest in gold is to buy gold stocks, although that carries the risk of investing in the stock market as well.
Other commodities can also be an option for retirement savers who don’t have multi-million-dollar portfolios. For example, Vanguard’s Commodity Strategy Fund requires a minimum investment of $50,000, which is doable for many retirement savers.
Bitcoin and other cryptocurrencies don’t always require a minimum investment, but they can be extremely volatile. Thus, they may not be suitable for retirement savers who are closing in on their final working years before retirement.
There is more than one way to invest in real estate, so it offers another alternative option for your retirement savings portfolio. Real estate investment trusts (REITs) are a popular way to invest, as they do not require any hands-on management of rental properties.
REITs can be a good addition to a retirement portfolio for the average saver because minimum investment amounts range from a single share in a REIT that’s listed on a stock exchange to between $1,000 and $2,500 for public REITs that are non-listed.
Whatever you decide to do with your retirement portfolio, diversification is important. You may be limited by how much money you have to allocate to alternative investments, but some can offer attractive ways to diversify away from stocks and bonds.
Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now its editor-in-chief.