Far beyond stocks and bonds lies the world of alternative investing, where real estate, hedge funds, venture capital and other “non-traditional” investments are king. In an economy of increasing uncertainty it may be worth it to at least examine your options outside of traditional investments, especially when thinking about something as important as retirement.
First things first, alternative investing is no safe bet, and requires both a deep knowledge and experience to master, thus making professional financial advice key. Furthermore, even the best advice may not be enough and the general rule of thumb with alternative investing, according to Investopedia, is no more than 10 percent of your portfolio should go towards these investments.
Secondly, no investment can be made that may directly benefit the investor or a member of their immediate family, which can become increasingly difficult with real estate investments. Avoiding these so called prohibited transactions can save you quite a headache in the long run, keeping both you and your IRA or 401(k) in one piece.
Without heading the warning and proceeding with a prohibited transaction can result in the loss of tax deferred status for your retirement account, forcing you to, depending on the size of your retirement account, pay up a heft amount in taxes.
Of course none of this would be really be possible without self directed IRA’s and 401(k)’s which give investors the option to look outside traditional investments and head for the path less traveled. Since you are essentially borrowing money from yourself to either invest in a piece of real estate, or provide venture capital, you control the amount invested and the ability to hedge your risk.
Investing a piece of your portfolio in Real Estate Investment Trusts (REIT) for example could yield some nice gains while limiting volatility. A sample portfolio spanning from the year 1977 to 2007, with 10 percent invested in REIT’s, improved returns by 0.3 percent while slashing volatility by 0.9 percent, according to US News.com.
Instead of watching your 401(k) ride Wall Street’s roller coaster, diversifying into an alternative field may help protect your account against stock market swings, both improving returns and hedging risk, according to the Great Lansing Business Monthly.
The best chance you have at succeeding in the world of alternative investments is to understand where you want your money to go. If it’s real estate, get to know what properties interest you and their risk/reward. This scenario can hold true for any alternative investment, the more you know the better off you are. Then to ultimately keep risk on the low side, start small, don’t invest to large a portion of your retirement plan, and remember diversity will help. From there, understanding the rules of what you can and cannot do with your alternative investment can be your saving grace.