5 Alternative Investments for Your Retirement Portfolio in 2024

Many investors are feeling the pinch these days. Traditional portfolios, heavily weighted in stocks and bonds, haven't been delivering the growth some might expect. This has led many to explore alternative investments, venturing beyond the familiar territory of Wall Street in search of higher returns. In this article, let's take a look at five alternative investments you can add for your retirement portfolio going into 2024.

Alternative Investment: What is it?

Alternative investments are the broad asset category outside traditional equities and fixed-income securities. They seek to expose investors to various markets and strategies and, therefore, have the potential to realize benefits from diversification and potentially higher returns.

Key Benefits:

• Diversification: Low correlation of alternative investments with traditional stocks and bonds implies that their performance is not relative to the general market.
• Potential to have higher returns: It will be especially appealing during retirement planning when a maximum long-term growth rate is desired.
• Inflation hedge: This is mainly for real estate among the alternatives.

Key Risks:

• Illiquidity: Meaning it may take time to sell quickly if you need access to cash.
• Higher fees: These types of investments come with higher fees as compared to traditional options. These fees can eat into your returns, so due diligence is a must.
• Complexities/regulations: Some alternative investments can be pretty complex and have special regulations governing who can invest in them.

Who Should Consider Them?

• Investors looking towards the long term: Some alternative investments can be illiquid, but this also makes them more suitable for goals that have a much longer timeline, like retirement planning.
• For people wanting to diversify from traditional stocks and bonds: If you are looking at a portfolio split beyond the traditional 60/40 and, in addition, want to add one more extra layer of diversification, alternative investments offer a broader choice to select from.
• Suitable for those comfortable with some level of risk: In most cases, alternative investments involve comparatively more risks than traditional options. One should be aware of their risk tolerance before even considering them.

For any alternative investment, do complete research before committing to it. Try to consult a suitable financial advisor to guide you through the minefield of the complexities and determine whether a particular alternative investment is in accord with your goals and risk tolerance.

Top 5 Alternative Investments for Your Retirement Portfolio

While alternative investments offer a wider playing field, it's important to choose wisely. Here are some options to consider for your retirement portfolio and the advantages and disadvantages associated with them:

1. Real Estate

Real estate refers to ownership of land, buildings, or other physical property. It’s a conventional investing alternative with a longer account of wealth creation. You can purchase properties directly either residential or commercial. You can also invest in Real Estate Investment Trusts (REITs) which pool investor funds to purchase and manage income-producing real estate. 

Advantages:

• Passive income: Lease income from properties provides a level flow of cash.
• Potential for appreciation: Property values often tend to appreciate over time.
• Hedge against inflation: Property values often rise alongside inflation.

Disadvantages:

• Market volatility: Real estate values can fluctuate based on location and economic conditions.
• Illiquidity: Selling real estate can be a time-consuming process, making it a less liquid investment.
• Management responsibilities: Direct property ownership comes with the responsibility of maintenance, repairs, and tenant management.

2024 Outlook: The real estate market in 2024 is expected to see continued growth, albeit at a slower pace than recent years. Rising interest rates may cool down some of the market frenzy but the long-term fundamentals of real estate remain strong. According to a recent forecast by Comerica, national home prices are projected to rise by 2.9% in 2024.

2. Private Equity

Investments in businesses that are not listed on stock exchanges as publicly traded are referred to as private equity. High-net-worth individuals and institutional investors provide cash to private equity firms, who utilize the money to buy and run these private businesses.

There are several strategies within private equity, each targeting companies at different stages of their development.

• Venture capital: Focuses along support early-stage high-growth startups with great prospective reward.
• Growth equity: Invests in established companies with a proven track record, aiming to accelerate their growth and eventually take them public (IPO).
• Buyouts: Acquires profitable companies with the intention of improving their operations and eventually selling them for a gain.

Advantages:

• High potential returns: Private equity investments have the potential to generate significantly higher returns than traditional stocks and bonds.
• Access to exclusive opportunities: Offers access to high-growth companies not yet available to the public market.
• Active management: Private equity firms actively manage their portfolio companies, which can lead to significant value creation.

Disadvantages:

• Illiquidity: Investors cannot easily sell their shares before the investment matures.
• High minimum investment: This makes them inaccessible for many individual investors.
• Higher fees: Private equity firms typically charge higher fees than traditional investment options.

2024 Outlook: The private equity market is expected to remain robust in 2024. This is driven by continued investor interest in alternative investments and a large pool of dry powder (uncommitted capital) waiting to be deployed. However, rising interest rates could dampen valuations and make it more challenging for firms to exit their investments. According to a recent report, global private equity deal values have fallen 60% from their peaks in 2021. 

3. Commodities

Commodities are basic physical goods that can be traded on exchanges. They can be broadly categorized into four groups (energy, metals, agricultural, and livestock). Investors may get exposure to commodities in a number of ways:

• Futures contracts: Promises to purchase or sell a good at a fixed price at a later time. 
• Commodity ETFs (Exchange Traded Funds): These track a basket of commodities, offering a diversified way to invest.
• Companies involved in commodity production: Investing in companies that mine, produce, or refine commodities can provide indirect exposure.

Advantages:

• Diversification: Their performance often has a low correlation to stocks and bonds.
• Hedge against inflation: As inflation rises, the value of commodities often increases as well. 
• Potential for high returns: Commodity prices can be volatile, but this also offers the potential for high returns, especially during periods of strong demand and limited supply.

Disadvantages:

• High volatility: Commodity prices can fluctuate significantly due to various factors –  weather, geopolitical events, and supply chain disruptions.
• Storage costs: Investing in physical commodities often involves storage costs, which can eat into returns.
• Limited liquidity: Some commodities may be less liquid than others, making it difficult to sell your investment quickly.

2024 Outlook: The commodity market outlook for 2024 is uncertain. Geopolitical tensions and ongoing supply chain issues could continue to drive up prices for certain commodities like oil. However, rising interest rates could dampen demand and lead to price corrections. Investors should carefully research specific commodities and consider their risk tolerance before investing. 

4. Private Credit

Private credit refers to debt financing provided to companies outside of traditional banking channels. Unlike publicly traded bonds, private credit involves lending directly to businesses or investing in loans originated by private lenders.

There are several strategies within private credit:

• Direct lending: Provides loans directly to companies, typically established and profitable businesses with a good credit history. 
• Mezzanine debt: It offers higher potential returns compared to senior debt but also carries a higher risk of default.
• Distressed debt: These investments offer the potential for high returns if the company successfully restructures its debt, but also carry a significant risk of default.

Advantages:

• Potential for higher yields: Private credit investments can offer significantly higher yields than traditional bonds, making them attractive for income-oriented investors.
• Diversification: Its performance often has a low correlation to traditional asset classes.
• Less market volatility: Private credit can be less volatile than publicly traded bonds, as the underlying assets are not subject to daily market fluctuations.

Disadvantages:

• Higher risk: Private credit investments generally carry a higher risk of default compared to traditional bonds.
• Illiquidity: Some have lock-up periods that can last several years. Investors cannot easily sell their holdings before the investment matures.
• Complex investment structure: Private credit investments can be complex and require careful due diligence to understand the risks involved.

2024 Outlook: The private credit market is expected to see continued growth in 2024, driven by investor demand for yield and the search for alternative investments. However, rising interest rates could make it more expensive for companies to borrow, potentially impacting deal flow. According to S&P Global, the global private credit market is a “growing segment of non bank finance.” 

5. Hedge Funds

Actively managed investment pools, or hedge funds, use a variety of techniques to produce returns. Hedge funds are more flexible than mutual funds in that they may invest in a wider range of assets and employ leverage, or borrowing money, to increase returns. Mutual funds, on the other hand, monitor a certain market index.

There are numerous hedge fund strategies, each catering to different market conditions and risk tolerances. Here are a few common examples:

• Long/short equity: Invests in both long and short positions of stocks, aiming to profit from rising and falling stock prices.
• Global macro: Focuses on macroeconomic trends like interest rates, currency fluctuations, and geopolitical events, using various instruments like bonds.
• Event-driven: Targets companies undergoing specific events like mergers, acquisitions, or bankruptcies, aiming to profit from price dislocations caused by these events.

Advantages:

• Potential for absolute returns: Hedge funds have the flexibility to generate returns regardless of the overall market direction.
• Diversification: Certain hedge fund strategies can offer diversification benefits by employing strategies uncorrelated to traditional assets.
• Skilled management: Hedge funds are typically managed by experienced investment professionals who actively research and implement their strategies.

Disadvantages:

• High fees: Hedge funds typically charge high fees, including a management fee and a performance fee (percentage of profits).
• High minimum investment: Many hedge funds have high minimum investment requirements.
• Complexity and risk: Hedge fund strategies can be complex and involve a high degree of risk.

2024 Outlook: The hedge fund industry is expected to see continued growth in 2024, driven by investor demand for alternative investments and the potential for absolute returns. However, increasing scrutiny from regulators and the pressure to justify high fees could pose challenges for the industry. According to a report by Statista, global hedge fund assets under management are projected to reach 23% in 2024. 

Build Your Alternative Investment Portfolio

The amount you allocate to alternative investments depends on your individual risk tolerance and retirement timeline. Generally, investors with a longer time horizon and a higher risk tolerance can allocate a larger portion of their portfolio to alternatives. The best allocation for you will depend on your unique financial situation and risk tolerance. Consulting with a financial advisor can help you determine the optimal asset allocation for your retirement goals.

The key takeaway is to do your research, understand your risk tolerance, and consider seeking professional advice from a qualified financial advisor. With careful planning and due diligence, alternative investments can play a valuable role in helping you achieve your long-term retirement goals.

Don't be afraid to explore the world of alternative investments. Concreit can be a valuable resource in your journey. Reach out to our team to learn more!