When it comes to building a robust portfolio for the future for your retirement account, the argument between investing in traditional investments, such as stocks and bonds, or alternative assets, such as real estate, continues to ensue. While stocks have historically been the go-to for long-term wealth accumulation in one’s IRA, the volatility and market dependency of stocks have prompted many investors to look elsewhere for more stable and diversified growth. Enter alternative assets – a category that includes real estate, private business stock, private equity, investment funds, cryptos, gold, and more.
In this article, we’ll explore why using a Self-Directed IRA to invest in alternative assets can be a better long-term investment strategy compared to traditional investments, especially for those looking to reduce risk, maximize returns, and achieve greater portfolio diversification.
Lower Volatility, Higher Stability
Stocks are infamous for their market volatility. No one really knows why stocks go up or down. Even solid companies can experience significant stock price fluctuations based on market sentiment, economic events, or industry disruptions. For long-term investors, the constant ups and downs can be worrying and harmful to wealth-building goals for ones retirement, especially when markets take a downturn.
Alternative assets, on the other hand, tend to offer greater stability. For instance, real estate is typically less sensitive to stock market movements and tend to hold or increase in value over time, even during periods of market turbulence.
Why Stability Matters for Your Retirement:
- Real Estate: Properties, especially in strong markets, provide stable cash flow through rental income, and their value often appreciates regardless of stock market swings.
- Precious Metals: Investments in gold, silver, and other commodities often act as safe-haven assets during stock market crashes.
- Investment Funds: These investments, such as private equity, are insulated from daily market volatility, offering more predictable, long-term growth.
Enhanced Diversification and Risk Management
Diversification is a key principle of any successful investment strategy. This is especially true when it comes to one’s retirement investment plan. Relying too heavily on stocks can expose your portfolio to unnecessary risk, as stocks tend to be highly correlated with the overall market. In a market downturn, even a well-diversified stock portfolio can suffer significant losses.
Whereas alternative assets provide diversification benefits that can help mitigate this risk. By spreading investments across different asset classes, Self-Directed IRA investors can reduce their overall exposure to stock market volatility. Many “alts” have a low correlation to traditional equities, which means they may perform well when stocks are underperforming.
Benefits of Diversification for IRA Investors:
- Dissimilar Returns: Assets like real estate don’t move in tandem with the stock market, reducing overall portfolio risk.
- Risk Sharing: Holding a mix of asset types means that when one asset class declines, another may increase in value, balancing losses.
- Strong Hedge: Alternative investments can perform well during market downturns, providing a buffer against large losses in stock-heavy portfolios.
Potential for Higher Returns
While stocks can provide meaningful short-term gains, they also come with higher risks. Alternative assets, on the other hand, offer the potential for higher returns over the long term, which is perfect for IRA investors, often without the wild variations that come with equities.
For example, private equity investments have historically outperformed public markets. By using an IRA to invest in privately-held companies, investors can access high-growth opportunities that may not yet be available to public market participants. Additionally, real estate investments can provide consistent rental income, tax benefits, and long-term appreciation, all of which contribute to superior returns over time.
Why Alternative Assets Can Offer Better Returns:
- Private Investments: Offers access to high-growth companies before they go public, often delivering higher returns than stocks.
- Real Estate: Provides both income from rents and potential for capital appreciation, often outpacing inflation.
- Precious Metals: Can offer strong returns during inflationary periods or economic uncertainty, outperforming many stock sectors.
Inflation Hedge
One of the greatest challenges for long-term investors, including retirement investors, is inflation, which corrodes the purchasing power of money over time. Stocks can sometimes struggle to keep pace with inflation, particularly during periods of economic uncertainty.
Alternative assets, on the other hand, often serve as a natural hedge against inflation. Real estate, for example, tends to increase in value alongside inflation, and rents can be modified to keep up with rising costs. Precious metals like gold and silver also tend to rise in value during inflationary periods, making them a valuable addition to any inflation-conscious portfolio.
How Alternative Assets Hedge Against Inflation:
- Real Estate: Property values and rents tend to increase with inflation, helping investors maintain purchasing power.
- Metals: Gold, oil, and agricultural products often rise in price when inflation surges, providing a hedge against devaluing currencies.
- Private Company Investments: Investments in private business, such as utility and other industrial businesses tend to offer inflation-protected, stable income streams, as many contracts are tied to inflation adjustments.
Access to Exclusive Investment Opportunities
Private placements, venture capital, and hedge funds often provide access to exclusive opportunities that the average stock investor cannot reach. These asset classes are typically available only to accredited investors or through specialized investment platforms, and they offer exposure to early-stage companies, niche markets, or unique real estate projects that have the potential for significant upside. An accredited investor is an individual with at least a $1 million in net worth, excluding a primary residence, or $300,000 of annual income if married filing jointly.
By investing in alts, you gain access to assets that can deliver unique growth opportunities that are often not available in public markets.
Benefits of Exclusive Access:
- Early-Stage Investment Opportunities: Private placements and venture capital allow investors to get in early on companies with high growth potential.
- Unique Private Real Estate Projects: Investments in commercial properties, multi-family units, or real estate developments offer unique advantages over traditional real estate or REITs.
- Bespoke Market Exposure: Hedge funds and private investments allow access to niche markets and strategies, such as distressed assets, that stocks can’t provide.
Conclusion
Investing in traditional assets like stocks, bonds, and mutual funds offers liquidity, transparency, and regulatory oversight. These investments are well-established, offering investors historical data for analysis, and are typically traded on public exchanges, making them accessible. Traditional investments are relatively easy to understand and monitor, suiting both novice and experienced investors.
In contrast, alternative investments encompass assets such as real estate, private equity, hedge funds, commodities, and cryptocurrencies. These investments often offer higher returns but come with some risk and less liquidity. Alternative investments are sought for portfolio diversification and are typically favored by experienced investors seeking to hedge against market volatility.
In a perfect world, your retirement holdings should balance each other with a mix of traditional investments and alternative assets. As always, be sure to consult with a financial advisor to ensure your goals and risk levels are at a level you are comfortable with.
