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Smart Retirement Portfolio Moves to Make Now

Alternative investments—such as private equity, real estate or private debt—are continuing to gain popularity for investors seeking to diversify their retirement plan assets. Institutional investors have already allocated as much as 26% of their overall allocation to alternative assets.1

Key Reasons to Consider

Why have institutional investors increased their alternative investments over the past 10 years? The answers are: timing, long-term growth, diversification, and a lack of confidence in traditional stock and bond investments.

Let’s look at those four points:

  • Timing: With the U.S. stock market on an 11-year rally, institutional investors are concerned that traditional asset classes may have gotten a bit frothy, and that alternative investments may be a good buffer from the volatility that we’ve seen in the stock market in recent weeks.
  • Long-Term Growth: Because of their long-term nature, alternative investments can provide a safety net from market volatility. Most alternative investments require locking in investments for at least 3 to 5 years before investors can make withdrawals or cash-in profits. Not sure if this should be listed as an attribute. How does locking up their money equate to safety?
  • Diversification:Alternative investments generally do not correlate fully with traditional stock and fixed income asset classes. When the market goes down, alternative investments might go up, or at least not decline as sharply as traditional market instruments. Lower correlations to stocks and bonds are a good reason to include alternative investments as part of a portfolio.
  • Lack of Confidence in Traditional Markets: The 2008 Great Recession taught institutional investors a good lesson: Markets could go down at any moment. As a result, both private foundations and public pensions have shifted some of their assets to alternative investments since 2007.

Get Ahead of the Curve

One common objection to investing in alternatives is their tendency to be illiquid positions with holding periods of three to five years. Yet smart investors and their advisors are learning that self-directed IRAs are a powerful vehicle to buy and hold these less-liquid investments— for the flexibility alternative investment IRAs can deliver in retirement and tax planning. Again, is illiquidity a selling point for the reader?

According to a new report from global research and consulting firm Cerulli Associates, U.S. advisors’ average allocations to alternative investments in 2017 were 7.2% of their total assets under management, compared to 5.7% the prior year.

Alternative investments offer investors the potential to avoid extreme market volatility and losses in their traditional asset IRAs or retirement plan investments. By investing via a self-directed IRA, investors can diversify with alternative investments that are not correlated to traditional markets – and gain tax-efficient ways to hedge their retirement savings from potential market swings.

Be Aware of the IRA Rules

Self-directed IRAs provide a great deal of freedom and flexibility with investment options that include – real estate, venture capital, hedge funds, limited partnerships, limited liability companies, crowdfunding investments, precious metals and other non-traditional assets. Certain IRS rules and regulations, called Prohibited Transaction rules, exist that investors need to be aware of and follow. The IRS mandates these rules to make sure that you do not receive any personal benefits from your retirement account until retirement. – confusing Failure to adhere to these rules could result in loss of the tax-advantaged status for the IRA- so it’s important to work with a tax professional and custodian that specialize in alternative asset IRAs.

The allocation to alternative investments in a portfolio should depend on the specific goals and circumstances of each investor, so consult with a financial advisor. Due diligence and education is always the best foundation before making any important financial decision. A financial advisor can help address an investor’s return goals, risk tolerance, liquidity needs and other factors unique to their circumstances.

Gear Up

Having an alternative investment strategy when a bull market wanes and traditional markets are volatile can help cushion a retirement portfolio and provide greater diversification to reduce risk and achieve better returns.

Take note of what the professionals who watch over the assets of large institutions, allocators and family offices are doing when it comes to evaluating and increasing positions in alternative investments. Market volatility has increased, and it may make sense for individual investors, advisors and professionals to consider including alternative assets within a retirement portfolio by using a self-directed IRA.

STRATA Trust is a self-directed IRA custodian, which specializes in holding alternative assets within IRAs.

    1. Pew Institute, State Public Pension Funds’ Investment Practices and Performance, September 26, 2018

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