When thinking about alternative investments in retirement, retirees first need to consider if they have the necessary assets and if they need liquidity. In recent years, investors have witnessed the influx of alternative investments for certain accredited investors. In fact, alternative investments are expected to grow from $12.9 trillion in 2022 to $17.2 trillion in 2025.

What is an alternative investment?

“Alternative investments” is a broad term covering various strategies and assets that differ from traditional investments like stocks and bonds. The projected growth in alternative investments stems from the belief that they have the potential to improve the risk/reward profile of a traditionally diversified portfolio.

While today’s portfolios may benefit from diversification into alternatives, it’s essential to recognize that risks, returns, and market correlations can differ greatly among these investments. It’s crucial to first identify your goals for including alternative investments, then choose the strategy that aligns with those objectives.

Here are some common types of alternative investments:

• Private Equity: Aims to capitalize on the growth of private companies. This is a long-term, illiquid investment outside the public markets.
• Hedge Funds: These investments have broad flexibility in the strategies they employ to meet their investment goals.
• Commodity Pools: Pools of funds from investors seeking exposure to commodity trades, managed by professionals.

Can anyone buy alternatives?

Alternative investments are generally intended for “accredited” or “qualified” investors—net worth of at least $1 million (excluding his/her primary residence) or earns $200,000 ($300,000 if married) in two of the most recent calendar years and have experience with investing- because they often require high minimum investments(Typically $50-$100k). However, some mutual funds are modeled after alternative investment strategies, offering more accessibility through daily liquidity and lower minimums.

In conclusion

Alternative investments for retirees can add great diversification to your portfolio as most alternatives are non-correlated to traditional asset classes (like stocks and bonds). They can help reduce overall portfolio risk by providing exposure to different types of assets, provide the potential for high returns and some real estate related alternatives have some taxable advantages. The downside is they are typically not as liquid as stocks/bonds, so it is very important to consider liquidity and if you need the money anytime in the near future.

Before investing in any mutual fund or alternative investment, make sure to review the prospectus. It contains important information about fees, risks, and objectives. Be sure to read it carefully or consult with your financial professional before making any decisions.