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11 Alternative Investments to Diversify, Protect & Grow Your IRA
Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed. Learn more
Last Updated on: 29th December 2015, 09:58 pm
Alternative investments incorporate various types of assets, most of which can be held in an IRA. Holding different assets brings you risk and return diversification, like the old adage says, never put all your eggs in one basket. If you are holding a mix of the assets mentioned here you are also holding a portfolio more similar to the famed Endowment Model which has given colleges outstanding results on a continued basis. IRAs have a very long investment horizon this allows you to keep money in very illiquid assets, a bit like pension funds or endowments. We are going to have a look at 9 alternative investments to hold in your IRA,
#1 Precious metals
Precious metals are well known for being good diversifiers of risk within a traditional portfolio. This is always a desirable factor when constructing a portfolio, however possibly their most valuable attribute is their high positive correlation to inflation. Gold especially has a big tendency to follow inflation, especially unexpected inflation. This means that while bonds and stocks are most likely to suffer in periods of high inflation Gold is more likely to perform well. The types of precious metals you can add to your IRA are restricted by the IRS mostly for limits on purity. You can also gain exposure to precious metals by investing in ETFs that specifically hold these metals like GLD, SLV or PPLT, but for real safety and protection we always recommend bullion. Check out some of the companies that offer bullion IRA investments on this page.
#2 40s Act Funds
40s Act Funds, also known as Alternative Mutual Funds, are Mutual Funds that are set up to mimic the strategies employed by Hedge Funds. However they have many restrictions which allow them to be marketed to the general public. The restrictions make these investments less risky when compared to Hedge Funds. Restrictions are on things like how much leverage they can use, how concentrated their positions may be and how much capital they can hold in illiquid assets. These types of funds are offered by Mutual Fund managers but many are also offered by Hedge Fund managers. Choosing a Hedge Fund manager in my opinion is the better choice as they have more experience with the kinds of strategies they will be implementing. Others will say that due to the smaller management fees obtained by the Hedge Fund managers compared to their real Hedge Funds they are less incentivated to manage the 40s Act fund. These funds have been growing at a faster pace than Hedge Funds, originally designed to attract retail investors they have also been able to attract institutional investors with limitations on investing in Hedge Funds.
#3 Hedge Funds
This option is definitely not for everyone and is recommended to experienced investors… If your IRA is large enough you may want to consider real Hedge Funds which offer a low correlation to traditional investments such as Stocks and Bonds. They also may have the potential to protect against downside risk in a time of crisis. Hedge funds are well known for being risky, but they may also offer outstanding returns. These investments are for accredited investors only, as they are deemed capable of assessing the risks of the investment appropriately. For those willing to spend the time and resources to implement proper due diligence, holding the right Hedge Funds may diversify and enhance the portfolio and give you exposure to a different revenue source. Hedge Funds also offer many different types of strategies. Depending on the strategy the underlying investments will be bonds, stocks or currencies as well as the derivatives of any of those. Using a hedge fund database like BarclayHedge or Hedge Fund Contacts can help you monitor the performance of thousands of funds and therefore choose the right partner to invest with.
#4 Secondary market annuities
The may represent opportunities to access a steady and secure income stream. These cash flows are paid for in full up front, with an adjustment so that the income stream generates more money than the investment value. These annuities are sold by lottery winners or holders of an annuity policy who wish to cash in net present value all of the future payments. Your counterparty is therefore either the State lottery or a large insurance company. Just make sure if the issuer of the annuity is an insurance company it’s one of the large ones and not an obscure name. These investments are particularly desirable in a low interest rate environment. Check out our secondary market annuity review page for more info.
REITs (Real Estate InvestmentTrusts) are a great way to access exposure to the Real Estate market without having to wait till you have enough money to buy a whole building. There are many publically traded REITs some research will be necessary before you determine the right one. These funds will concentrate on type of property, i.e. residential or commercial and locations such as East or West coast. They will also mainly invest directly in property or invest in Mortgages. Some will invest in both, equity and loans, and are known as Hybrid REITs. Like Mutual Funds, REITs do not pay tax at the corporate level as long as at least 90% of profits are distributed per year. Publicly traded REITs also carry some of the risk and return drivers of other Stocks. Like the stock markets they are easily bought and sold this can create a lot of price volatility at times of stress. This volatility contrasts with the low volatility found in Private Real Estate funds which do not exchange hands so frequently. However if you hold your investment over the long term you should see more stable results.
Commodities are amongst the Alternative Investments with the least correlation to Stocks and Bonds. They have a lot of diversification potential due to that low correlation. Many Commodities will also have a strong positive correlation to inflation, as often they are the base materials that make up the products that are included in an inflation basket. As in Crude Oil or Wheat. When looking at this asset class it is best to go for a wide variety of commodities. Whatever portion of your IRA you are going to allocate to this asset class it is best to choose a broad basket. This can be achieved easily buy investing in ETFs that track Commodities by type, as in Agriculture, Energy or Live Stock. Or you can also choose to invest in ETFs that track a broad basket of Commodities like DBC or DJP which track broad commodity indices.
#7 Peer to Peer lending
This type of investing has begun to take on more appeal given the low yields on treasuries or corporate bonds. Add to that the high volatility in the stock market and investors have taken up the search for a new means of obtaining a decent yield without taking on excessive risk. Peer to Peer lending makes use of modern technology to put together private lenders and private borrowers. These borrowers may not find it easy to borrow from financial institutions but are willing to pay a decent percentage to get their loan. Interest rates on these loans vary from 5% for the more accredited borrower to as high as 11% for the sub-prime borrower.Some of the largest and most popular platforms include Lending club and Prosper. These platforms attract potential borrowers who apply for a loan. The company does the qualifying check and sets the interest rate on the loan. The lenders sign up to the platform to open an account and buy notes that are issued by the platform and guaranteed with the loans. The duration of the notes is usually between 3 to 5 years. On both of the above sites the minimum investment starts as low as $25.00 Lending Club, which was founded in 2006, went public last December with an IPO. This platform has seen loans grow every year to the tune of $1.9 billion. Check out the best peer to peer lending comparison table for investors for more info.
#8 Startup Funding
Besides Peer to Peer Lending and Crowdfunding, another group of fundraising platforms that bring investors and those in need of funds together are the startup funding platforms. These platforms are populated in part by Venture Capitalists and Angel Investors, but also by accredited investors who are considered to be smaller and who want an opportunity to participate in the high risk-high reward businesses that have discovered and funded the deals and offers from the likes of Facebook, Twitter, and Yelp. More often than not, these investments are eligible in a self-directed IRA. If you would like to compare the top startup funding platforms for investors, follow this link: startup funding platforms for investors.
Crowdfunding is a personal and small business financial revolution whose time has come at last. Though it began in earnest back in the 2006-2009 time period around the Great Recession and its immediate aftermath, these sites, companies, and platforms have really come into their own in the last three to four years. 2012 saw the initial implementation of the JOBS Act that allowed equity crowdfunding to begin in earnest, and this space has only grown from strength to strength in the past few years. Now you have top players and niche crowdfunding sites encompassing equity, real estate, student lending, medical research and innovations, creative and technological innovation, and overseas microloans. Make sure you check out our top crowdfunding solutions page to find the right platform for you.
Infrastructure is another one of those assets that is linked positively to inflation. The companies that operate infrastructure usually have low to no competition, for example a toll on a bridge. The prices although often controlled by authorities are usually linked to the rate of inflation. This makes them great protectors against the erosive effect of higher prices. They also have a low correlation to stocks and bonds, as their income streams are usually well secured by the necessity of the service offered. The best way to gain exposure to these assets is through Infrastructure funds that are traded publicly like Brookfield (NYSE:INF). You can also invest in infrastructure REITs which usually specialize in different infrastructure assets. Within infrastructure there are 3 main sectors of economic infrastructure:
a) Utilities; Electricity & Gas distribution, Treatment & distribution of water, Renewable energy and Communication infrastructure.b) Transport; Toll roads, bridges & tunnels, Airports, Seaports and Rail networks.
c) Specialty Sectors; Car parks, Storage facilities and Forests.Other non-economic infrastructure includes Hospitals, Care centers, Educational facilities, as well as Courts or Prisons.
You can also pick your own portfolio of infrastructure stocks amongst the many that operate in Utilities or Transportation. You could also invest in an ETF tracking infrastructure assets. There are various that track global broad indices of infrastructure companies.
#11 Publicly traded Private Equity funds
Private Equity had always been an investment for accredited or institutional investors. In the late 1980s some funds specializing in Private Equity began to operate as publicly listed companies. Private equity gives investors exposure to investments in medium size companies that decide to raise private equity to take the company private. This allows the Private Equity fund to install new managers and improve corporate governance in the attempt to maximize shareholder wealth. These investments are extremely illiquid as it may take various years before the acquired company turns a profit, usually when it is sold to a competitor or taken public again through an IPO. The publicly listed investment in Private Equity is great way to get around the liquidity problem, as the shares are openly traded. Usually these funds have various companies in their portfolio so their overall performance is not subject to negative cash flow by being in the early stages of one particular investment. It also allows for them to pay dividends, which may not always be the case of a private fund.These funds however are also subject to the same volatility as the general sock markets. This is probably due to the fact that even though the companies they hold are private they are investing in equity, and the fund’s shares are traded on a public exchange. So not much value in portfolio diversification but it does allow for diversifying revenue source and may provide return enhancement.
Ultimately it’s essential to have a good mix in any portfolio, but an IRA has a much longer time horizon than other assets. We may have another 10 or 15 years or longer before we begin making use of those savings. This allows us to hold alternative investments for the long run and buffer the possible lack of liquidity of some types of investment.