Rethinking Retirement: Exploring Alternative Investments for a Sustainable Future
For as long as many can remember traditional retirement planning focused on a core portfolio of stocks and bonds. Seems good enough right? While this approach has served many well, the current economic landscape with low interest rates (past tense and thing of the past) and potential market volatility has some retirees questioning its reliability for generating sustainable income. A lot of retirees don't understand how impactful the sequence of returns is when they're drawing out gobs of income in their retirement years. Stocks are a great place to be on a 30-year ramp-up to amassing a mountain of wealth. The other side of the mountain is a completely different story. It's more about losing less or keeping more of what you've already made. Investors need to understand there is a clear distinction between accumulation and distribution. Once you've reached or are near this phase in your life, it's time to make some changes. This is where alternative investments enter the scene, offering a chance to diversify and potentially boost returns.
What are Alternative Investments?
Alternative investments are assets outside the typical of traditional stocks, bonds, and cash. You're probably thinking, what else is there to invest in? A lot of people will jump to the conclusion that alternatives mean real estate. That thought is sorta right. They encompass a diverse range of options, including:
Private Equity:Â Investing directly in private companies not publicly traded on stock exchanges. They are very complex, have capital requirements, minimum initial investments, and require the individual to comprehend sophisticated investment concepts.
Venture Capital:Â Funding for high-growth startups with the potential for high returns (and high risks). Again, this requires larger dollar amounts and is tailored to your more sophisticated individual with plenty of assets and time.
Hedge Funds:Â Actively managed funds employing complex strategies to generate returns in various market conditions. You're probably used to seeing or reading about the hedge fund managers and how well off they are. The truth is many of these are extremely expensive and can have a difficult time beating the market returns year after year. Not all are created equal so be sure to meet with your financial advisor and carefully consider all aspects before investing.
Real Estate:Â Investing in physical properties like rental buildings or commercial spaces for rental income and potential appreciation. Being a landlord and dealing with the mundane duties of being a property owner and manager isn't for everyone. There are options to invest in publicly traded and liquid investments as well as private or non-traded ones as well.
Commodities:Â Owning or trading raw materials like oil, gold, or agricultural products. This one isn't for the faint of heart. This asset class can be boom or bust depending on the year, month or even week you invest or decide to exit. You'll want to find an expert in this area if you choose to invest in this asset class. There are traders and commodity specialists out there that trade day in and day out. That is certainly not me or anyone here at the firm.
Pros of Alternative Investments for Retirees
Diversification:Â Â Alternative investments can offer lower correlation to traditional assets, meaning they might not move in tandem with the stock market, potentially mitigating risk and volatility in your overall portfolio. That can be a very good thing for someone more focused on the reliability and sustainability of their portfolios so they can draw income. Owning what was traditionally thought of as a "balanced" and diversified portfolio made up of only stocks and bonds would've been crushed in 2022 and that's just what happened to many retirees. That's a sting they'll remember throughout retirement depending on what they did next.
Potential for Higher Returns:Â Â Some alternative investments, like private equity and real estate, have the potential for higher returns than traditional stocks and bonds. Believe it or not, this can be true. Sounds pretty attractive to have the potential for more stability and a chance to even outperform the traditional investment classes.
Income Generation:Â Â Certain alternatives, like real estate and some private debt funds, can provide a steady stream of income through dividends, rent payments, or interest. Income-producing asset classes are gaining more and more traction and ones that are a part of the "alternative" space are helping enhance retirees' income.
Cons of Alternative Investments for Retirees
Higher Costs:Â Â Alternative investments often carry higher fees and expenses compared to traditional mutual funds and ETFs. These impact returns substantially so you'll want to know what they are going into the investment. You'll also want to know how your advisor is being paid. Is he or she charging you upfront commissions? If not, they're likely collecting a percentage of your assets under management where they're sitting on the same side of the table as you. When the investment decisions are yielding better returns, your account grows as does their advisory fee. If the account loses value, the fee you pay them also follows suit.
Less Liquidity:Â Â Many alternative investments are illiquid, meaning they can be difficult to sell quickly for cash when needed. This can be a concern for retirees who might need access to their capital. It will be important to understand the amount of accessible cash with each of these investments and for how long. Work closely with your advisor to better understand how much should be placed into this asset class, what the purpose is, and tying up a portion of the retirement accounts will not negatively impact the overall financial plan.
Higher Risk:Â Â Some alternative investments, like venture capital, involve a significant degree of risk and are not suitable for all investors, especially those risk-averse in retirement. Because this space is so diverse, it's important to define the goal and purpose of the specific investment. Just because an investment falls under the classification doesn't mean it's more stable, reliable or going to provide protection simply because it's a non-correlated asset class.
Understanding the Risks and Costs
Carefully consider your risk tolerance and investment goals before venturing into alternative investments. These options are not without risk, and some may be complex or require a high minimum investment. Fees associated with alternative investments can significantly eat into your returns, so it's crucial to understand the cost structure before diving in.
Alternative Investments vs. Traditional Assets
Here's a table summarizing the key differences between alternative investments and traditional assets:
Feature | Traditional Assets (Stocks & Bonds) | Alternative Investments |
Risk | Moderate to High | Low to High |
Return Potential | Moderate | Low to High |
Liquidity | High | Low to Moderate |
Correlation to Market | High | Low to Negative |
Cost | Relatively Low | High |
Minimum Investment | Relatively Low | High |
Seeking Professional Guidance
Alternative investments can be a valuable tool for retirees seeking to improve their portfolio's resilience and potentially generate higher returns. However, due to their complexity and risks, it's essential to consult with a qualified financial advisor who understands your individual circumstances and risk tolerance. They can help you explore suitable alternative investment options and integrate them into a comprehensive retirement plan that prioritizes your financial security and long-term goals.
Remember:Â This blog is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial professional before making any investment decisions. That person could be me or someone else you can trust.
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