For many investors near retirement age — or anyone concerned about protecting their wealth — the economic impact of COVID-19 echoed losses from the Great Recession.
In 2008, investors with traditional portfolios and 401(k)s — assets many thought were shielded from massive market corrections — watched as their retirement funds plummeted by 20% or more.
At the time, target-date funds with retirements beyond 2020 experienced losses of over 30% since many far-dated funds were heavily allocated toward stocks. But those investors still had years to continue saving, and many were able to ride the bull market that began in 2009 and have rebuilt their wealth in the decade since.
But the COVID-19 pandemic, and the market losses it’s spurred, has reignited many investors’ fears that the same mistakes could be made again — especially since many hit by the Great Recession padded their portfolios with stocks to capture market gains, holding significant amounts of equity near their retirement date.
Now, many are turning to alternative investing as a solution, pursuing non-correlated assets like private equity, commodities and energy to protect their portfolios from another market crash — and grow their wealth if their traditional investments take another loss.
What are Alternative Investments?
Alternative investments describe assets out of the traditional markets for stocks, fixed income or cash — things like private equity, commodities, tangible assets, energy and real estate. Traditionally, investors have used these assets to diversify their portfolios and enhance their returns, since assets like private equity tend to yield much higher profits.
Because alternatives typically have a low correlation with standard assets — meaning their value tends to counter the stock or bond market — alternatives provide an effective hedge against inflation and remain a leading strategy for aggressive growth.
While portfolios of alternative investments — like those provided by alternative investment funds — may be new, investing in alternative assets has been around for a while. Anyone who’s invested in real estate, for example, or who holds private equity in a company, maintains an alternative asset. Investing in energy commodities, like oil and gas drilling, has also been a common pathway toward alternative investing.
With significant tax incentives, many investors turn to energy assets to take advantage of inflation hedges and seek quick returns from an investment in an upcoming energy project.
Among real estate and commodities, private equity remains the alternative investment with the highest risk and highest rate of return.
How can you invest in alternatives?
It’s important to recognize that alternative investing might not be the right choice for every investor, and while investing in a diversified alternative fund mitigates much of the risk investors would see if they invested in a private placement on their own, alternative assets like private equity still expose investors to risk.
Alternative investments can be a choice method for investors nearing retirement who desire investment assets that continue to grow their wealth, as well as for younger investors whose already diverse portfolios allow them to pursue more aggressive strategies.
In my experience managing an alternative investment fund, I’ve learned to guide investors to ask a few key questions to align the possibilities of alternative assets with their investment goals. Are you looking to put a discrete amount of capital into more aggressive strategies for passive investing? Are you nearing retirement and would like options to grow your wealth beyond the capacity of a traditional stock portfolio? Are you looking to pursue tax incentives? Or do you want a quick turnaround on commodity investments like energy?
Once you’ve answered those questions for yourself, you can start the process of choosing an alternative investment fund. With such a fund, accredited investors can spread their investments across an array of opportunities, from private equity in emerging startups to investments in high-return and seasonal commodities, like oil and natural gas.
Many alternative funds source and vet exclusive private placements, bundle those private equity opportunities so investors can allocate wealth across multiple ventures, and provide access to high returns from sourced commodities like oil and natural gas drilling. Make sure you choose a fund that mitigates the risks associated with alternative investing in assets like private equity. The fund should do the work of sourcing ventures and ensure investors aren’t significantly exposed with high-cost private placements.
For those nearing retirement — with no immediate need for liquidity in their investments and enough wealth to allocate their assets in the alternative sphere — an alternative wealth fund could better optimize an investor’s portfolio and secure a pathway toward wealth generation beyond the stock and bond markets.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.