It’s not hard to see the appeal of alternative investments (defined as investments in any asset class other than stocks, bonds, and cash). Due to their low correlation with the stock market, they can help mitigate the risk of market volatility and often have a higher expected return than stocks and bonds. But does it make sense for you to include alternative investments in your portfolio as you approach retirement?
There are a lot of factors you’ll need to consider before dipping a toe into alternative investing, including your current age, planned retirement age, risk tolerance, and asset classes. To decide if alternative investing is right for you, start by asking yourself the following four questions.
Are You Trying to Diversify Your Portfolio?
One of the main reasons that investors choose alternative assets is to diversify their portfolio and mitigate some of the risks associated with stocks and bonds. With alternative investments, individual investors don’t have to worry about losing years’ worth of savings in the event of a down market. If you’re approaching retirement, you may not have time to rebuild a traditional portfolio in the event of another stock market crash, and alternative investments can provide some financial cushion. However, it’s important to note that most alternative assets are long-term investments, which leads us to the second question you should ask yourself.
Can You Wait for Your Investments to Pay Off?
Most alternative investments have a relatively low degree of liquidity, which means you can’t buy and sell them as quickly as stocks and bonds. Some assets, such as hedge funds, even have lock-up periods during which investors can’t sell or redeem their shares. If you invest in alternative assets, you’ll have to be comfortable letting your investment sit and grow for a relatively long period before you can touch it.
Your wealth management advisor should be able to tell you how long you can expect to wait for different asset classes to pay off. The good news is that rewards come to those who wait: you can typically expect a higher return from alternative investments than from short-term investments. Alternative investments with Americans for Life, for example, have a target return of 6-10 percent.
Can You Handle Higher Upfront Fees?
Most alternative investments have higher upfront fees than traditional investments, which can be discouraging or even prohibitive to some investors. However, you can also expect low turnover with alternative investments, which means fewer management and transaction fees than traditional investments. If you can handle paying more up front, you’ll likely have fewer transaction costs eating into your return.
Are You Prepared to Do Your Research?
While alternative investments are generally considered low-risk, you’ll still need to perform due diligence to make sure the assets in which you’re interested fit with your retirement savings goals. You’ll need to ensure that you can live comfortably with illiquid assets and that you still have enough liquidity in your portfolio to act as a safety net in the event of an emergency.
You’ll also need to thoroughly vet the wealth management advisor with whom you plan to work. Make sure they have extensive experience with the asset class in which you want to invest, don’t have any conflicts of interest, and can explain the risks and expected rewards of your investment.
If you’re ready to speak with a wealth management advisor, call Americans for Life at (860) 426-2022 or fill out our online contact form.
You can also use our alternative investment calculator to estimate the return you can expect from investing with us. Find out if an alternative investing strategy will help you grow the wealth you need to enjoy your retirement.