Long-term investment strategies that involve purchasing and retaining assets for several years form the foundation of many retirement plans. Whether it is investing in stocks, bonds, mutual funds, or retirement accounts like the 401(k) and Individual Retirement Account (IRA), which typically mature at the age of 59.5 and often incur penalties for early withdrawals, all of these approaches operate on the fundamental principle of buy and hold. However, if you prefer not to pursue these conventional strategies and instead opt for alternative retirement plan options, there is a plethora of options left to explore.
A financial advisor can help you explore and select suitable alternative retirement investment strategies that can help you plan for your golden years. This article will explore some alternative investments that can be used in retirement planning.
Below are some of the best alternative strategies to safeguard your retirement years:
1. Factor-based investing
Factor-based investing focuses on specific factors that have historically been associated with better performance. It does not rely on traditional assets like stocks and bonds but rather aims to outperform traditional market-cap-weighted indices. According to factor-based investing, various factors other than the asset allocation of a portfolio can impact its returns and risk. These factors can be broadly categorized into two main types:
a. Macroeconomic factors: These factors consider broader economic conditions such as inflation, interest rates, and economic growth. For example, during periods of high inflation, specific sectors, like gold, may perform better than others.
b. Style factors: These factors focus on specific characteristics of individual assets, such as their valuation, quality, size, or momentum. For instance, value investing involves buying undervalued stocks, while momentum investing seeks to capitalize on the upward momentum trend of certain stocks.
Factor-based investing works on the principle that market conditions and investor behavior are dynamic and can change over time. Therefore, instead of relying solely on a tried-and-tested asset allocation, factor-based strategies continuously monitor and adjust portfolio allocations based on changing factors to potentially achieve better risk-adjusted returns. For example, if you spot stocks that are undervalued and trading below their intrinsic value in a bear market, you can strategically invest in them and position yourself for potential growth as the market recovers.
Factor-based investing offers the potential to enhance portfolio returns and manage risk more effectively, especially during periods of economic uncertainty or market volatility. It can help you create a more robust and adaptive portfolio, which may be particularly beneficial for wealth preservation in retirement.
2. Private equity
Private equity functions like mutual funds. A pool of capital gathered from multiple investors is invested in a fund managed by a private equity firm. However, unlike mutual funds, private equity investments typically involve shares that are not publicly traded on stock exchanges. As a result, private equity investments are not directly influenced by movements in the stock market. However, it is important to note that these shares may be less liquid compared to publicly traded shares, as they are not easily bought or sold in the open market. Despite this liquidity constraint, private equity investments offer the potential for better returns and unique investment opportunities.
Private equity funds typically follow two main strategies. Firstly, they may opt for control investments, where they acquire a majority stake in a company and actively participate in its management. Control investments aim to improve the company’s value through market expansion. Alternatively, some private equity funds specialize in minority investments. These focus on smaller companies that may be showing rapid growth or startups with promising potential. Although they do not own a majority stake, they aim to support these companies in achieving their growth objectives by providing strategic guidance. In both cases, the goal is to generate profits by investing in companies and aiding in their growth and development.
3. Real estate
Alternative investments in retirement plans, such as real estate holdings, can provide diversification and potential income streams beyond traditional stocks and bonds. Real estate can be a valuable addition to your retirement plan with several benefits. Firstly, it helps you create a passive income stream. Secondly, real estate may not always be affected by the highs and lows of the equity market, which makes it great for portfolio diversification.
However, investing in real estate can be challenging for most people as it requires high capital. But there are some options you can consider. You can buy rental properties by taking a loan, also known as leverage. This allows you to buy a property that may be more expensive than you could afford with your own savings. The right time to make this move can be when interest rates are low. During this time, borrowing money can be more affordable because you will pay less interest over time. This can increase your ability to buy rental properties and potentially earn more income from them. However, checking your credit score before considering this option is important. If you have a low credit score, you will find it hard to obtain a loan at a low interest rate. Even if you get a loan at a low interest rate, it is vital to research the property in question thoroughly. If you are not able to make money from your investment, you will be stuck with a liability in the form of a loan.
Alternatively, you can explore online crowdfunding. Online crowdfunding platforms allow you to invest in real estate with a smaller amount of money upfront. Instead of paying for the entire property, you can pool your money with other investors through the platform. This way, you can invest in real estate projects without needing a large sum of money.
Another option is considering Real Estate Investment Trusts (REITs). REITs are like mutual funds or stocks and can be traded on brokerages. You can buy and sell them just as you do with stocks, making them accessible to invest even on a small budget. REITs allow you to invest in big commercial projects like malls, offices, residential towers, etc. They are publicly traded and highly liquid, allowing you to exit when you wish.
4. Hedge funds
Hedge funds collect money from investors and use complex and sophisticated strategies like investing techniques such as hedging and leveraging to earn a return. Hedge funds can invest in a wide range of securities and assets. This includes individual stocks, bonds, currencies, arbitrage opportunities, commodity futures, and derivatives. Hedge funds are one of the few alternative retirement investment strategies that typically target high-net-worth individuals and institutional investors due to their sophisticated investment approach and higher minimum investment requirement. This is why only accredited investors with certain income or net worth thresholds are the primary clientele for hedge funds.
Investing in hedge funds can be more expensive compared to traditional mutual funds. In addition to the asset management fee, which typically ranges from 1% to 2% of Assets Under Management (AUM), hedge funds also charge a performance fee. This performance fee is a percentage of the fund's gains, often set at around 20%. Hedge funds also involve higher levels of risk due to their complex strategies and potential for leverage. You need to thoroughly understand the level of risk involved in the fund and carefully evaluate the qualifications and track record of the hedge fund managers. Additionally, consulting with a financial advisor can help you make informed decisions.
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5. Covered calls
Covered calls, sometimes referred to as a buy-write, involve selling a call option against a stock you have invested in. For example, consider a scenario where you purchase 100 shares of a particular stock. At the same time, you decide to sell ten call options associated with those shares. This combination of buying the stock and writing call options creates a covered call position.
You might find this strategy particularly useful if you plan to hold onto your stocks for an extended period but do not anticipate significant price increases in the near future. With covered calls, you have the opportunity to generate additional income for your investment portfolio. Covered calls allow you to sell call options and earn premiums while waiting for your stocks to appreciate in value. This extra income can complement your overall investment returns and help you achieve your financial goals. Investors usually adopt a regular schedule for selling covered calls, such as monthly or quarterly. You can implement a similar strategy of consistently selling call options to add a steady stream of cash income to your investment portfolio. This systematic approach can help you earn over time.
When considering covered calls, it is crucial to grasp the concept of the breakeven point. The breakeven point is a key metric to consider when evaluating the potential outcomes of your covered call investments. It is the price at which you neither make a profit nor incur a loss on the strategy. Calculating the breakeven point involves subtracting the premium received from selling the call option from the purchase price of the underlying stock.
While covered calls offer income-generating opportunities, they also come with risks. One significant risk to be aware of is the potential for stock price depreciation. Although stocks cannot drop below zero, a substantial decrease in stock price can lead to losses for covered call investors. Therefore, assessing your risk tolerance and carefully considering the implications of stock market fluctuations before engaging in covered call trading is essential.
6. Gold
Incorporating gold into your investment portfolio offers diversification benefits, stable returns, and ease of buying and selling. Gold is a highly liquid asset that has a proven track record of providing diversification benefits and delivering positive returns, regardless of inflation levels. It is a safety net for your investments that offers stability and helps mitigate risks. Gold has established itself as a dependable asset for stability and expansion. It has remained resilient whether the economy is thriving or faltering.
One of the remarkable aspects of gold as an alternative retirement investment strategy is its accessibility. You do not need substantial funds to invest in gold, and it is readily available in the market. Depending on your needs, you can invest as much or as little as you like. Being a commodity, gold can also be bought in multiple ways, ranging from jewelry to coins. Plus, understanding its value is straightforward, making it accessible to anyone interested in diversifying their portfolio. There is no complex calculation with regard to its returns. You also do not need in-depth knowledge of how the investment functions, as is the case with hedge funds, private equity, or even employer-sponsored retirement plans.
Selling gold is also hassle-free and has a straightforward process. Gold can be sold in the market and does not have a lock-in period, penalty for early exit, etc. It provides liquidity and ease of transaction to both buyers and sellers. You can liquidate your holdings into cash swiftly when needed. This feature provides flexibility and peace of mind, knowing that your investment can be easily sold when necessary. This can be particularly useful in times of emergencies. Additionally, gold has a reputation as a strong performer, making it an attractive option for diversification. Gold can also be suitable for seasoned investors as well as those just starting out.
7. Small businesses
When it comes to planning for your golden years, considering alternative retirement investment strategies like small businesses can be a smart move. Investing in or starting a small business offers the potential for significant growth and can diversify your retirement portfolio. Small companies have the advantage of scalability, which can lead to substantial growth opportunities. Moreover, they offer you more control over investing in a big company.
When exploring small business investment opportunities, it is crucial to identify ventures that align with your interests and have the potential to appreciate over time. Investing in businesses that resonate with your passions can not only be financially rewarding but also personally fulfilling. You must evaluate the demand and supply in the market and assess whether the business you invest in or start yourself can expand over time. It is essential to recognize that small businesses can fail easily, and these investments come with inherent risks. Unlike traditional investment options, small businesses may face challenges such as market competition, operational issues, customer loyalty, and economic downturns.
Making informed decisions is paramount, and before diving into a small business investment, you must conduct thorough research and get professional guidance from a financial advisor. A financial advisor can evaluate the potential risks and rewards associated with small business investments to ensure that your retirement savings are managed prudently.
To conclude
Alternative investments can enhance the appeal and resilience of your retirement plan. However, it is crucial to strike a balance by including a mix of traditional options like IRAs and 401(k)s and alternative investments like the ones mentioned above to ensure optimal diversification and mitigate risks. Since alternative investments require some knowledge and understanding, studying them thoroughly or consulting with a financial advisor is also advisable.
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