As alternative investments go mainstream, every investor should consider the simple question, “Are alternative investments right for me?” The answer depends on various questions, such as your investing goals, time horizon, and risk appetite.
We'll explore a few things to keep in mind when considering alternative investments and how there is an investment for everyone, depending on their goals.
Because alternative assets encompass such a broad spectrum of investments, every investor can find one that fits their risk profile. If you're looking to maximize returns and are willing to accept a significant amount of risk, options such as startup or angel investing, crowdfunding, or crypto investing might be suitable.
If you are less comfortable with risk, investments in certain types of real estate (such as long-term rentals or multi-family), precious metals, or lending might be more suitable.
Investing in assets outside of stocks and bonds allows you to diversify your portfolio across various asset classes. Doing so can protect your portfolio in case of a market downturn, or a pullback in a specific asset class, as we've seen in 2022 with the pullback of the tech sector.
Essentially, being diversified adequately across more than stocks and bonds allow you to protect yourself and your future by not being subject to forces outside of your control, such as changing interest rates which may disproportionately affect a specific asset class.
An important factor to keep in mind when considering alternative assets is the time horizon of the investment. It is common for alternative investments to have three, five, maybe even ten-year commitments and be illiquid.
One of the reasons we love investing in alternatives with retirement accounts is because, for most folks, retirement is still a few years away, and the money in their retirement accounts can be used for long-term investing and is not going to be used in the short term for consumption.
Due to the spectrum of investments that fall under alternative assets, the tax situation of different investments can vary widely. Taxes on real estate investments vary dramatically from startup investments to crypto. Not taking into account the tax implications of a specific investment or asset class can dramatically affect the outcome of the investment.
A straightforward way to avoid the tax complexity of alternative investments is to consider using a self-directed IRA or Solo 401(k) to make alternative investments.
Alternative assets encompass a broad spectrum with various possible investments available for every investor. Everyone has different goals, risk tolerances, and time horizons. The above are just a few things to keep in mind while considering alternative investments, and while we feel they are appropriate for everyone, not every investment will be.