The Alternative Investor’s Retirement Portfolio

December 16, 2021

As a whole, Americans aren’t saving enough for retirement. 22% of Americans have less than $5,000 stashed for their golden years, and only 5% have between $5,000 and $24,999 saved for retirement. Only 16% of Americans have $200,000 or more saved for retirement.

In other words? It’s time to change the way you shape your financial future.

Of course, when it comes to retirement, many Americans err on the side of conservatism for fear of losing their money. Which means many Americans don’t look twice at alternative investments, thinking they’re not the right fit for a retirement portfolio.

Are alternative investment retirement assets an oxymoron? Are alternative investment retirement portfolios an option worth pursuing? Here’s what investors should know.

What are Alternative Investments?

First, a quick review of the basics.

For those who aren’t familiar, alternative investments aren’t a single asset category per say. Alternative investment is actually a broad umbrella term covering any investment asset that doesn’t fit into one of the three conventional investment categories (stocks, bonds, or cash). In other words, if it’s not stocks, bonds, or cash, it’s technically an alternative investment.

That means alternative investments are an incredibly diverse group of assets, including:

  • Art
  • Antiquities
  • Collectibles
  • Real estate
  • Precious metals
  • Hedge funds
  • Venture capital
  • Private equity
  • Private debt
  • Peer-to-peer lending
  • Derivatives contracts

However, all alternative investments have a few features in common. First, they’re usually not traded on the major stock exchanges, and instead travel in small niche markets of interested investors. Second, they tend to be more complex than conventional assets—a Picasso, for example, is completely different from Pfizer stock—but this is also why they have low correlation to the stock market. Third, because of their complexity and relatively niche buyer markets, they tend to be illiquid, especially compared to conventional assets. Fourth, they tend to be less regulated than conventional investments.

Are Alternative Investments a Good Idea for Retirement?

So, what’s all the fuss about alternative investments?

First, it’s worth noting that a whopping 81% of high-net-worth individuals and their families use alternative investments, with alternatives usually accounting for 26% of their total allocation—far above the 5% allocation seen in an average investor’s portfolio but on par with the 10% to 20% allocation needed to see an appreciable difference in performance.

It makes sense when you see how alternative investments perform. Blue-chip art, for example, has outperformed the S&P 500 by 180% from 2000 to 2018, and has long been favored by high-net-worth individuals as a value store. After all, you can count on a Matisse to retain its value as a Matisse regardless of the global economy.

It’s also worth noting how alternative investments behave relative to conventional investments. Remember, alternatives tend to have low correlation to the stock market, meaning they tend to keep their value even when the stock market dips.

So, are alternative investments a good idea for retirement? That depends on you.

Alternative investments come with several benefits, but like any other investment, they also come with risks. You have to be conscious of your financial goals, your time horizon, and your risk tolerance. If you’re willing to accept a bit more risk in exchange for stronger returns, alternative investments may be a good choice for your retirement.

Also, keep in mind that alternatives will never make the majority of your retirement portfolio—advisors generally recommend 10% to 20% alternative asset allocation. The goal is to bring in returns around the margins and insulate your portfolio against stock market shocks, not reinvent your entire portfolio.

Alternative Investment Retirement Diversification Ideas

If alternative investment retirement options sound like the right fit for you, there are a few ways to get started.

First, you’ll need a way to manage your investments while insulating them against taxes so that you can make the most of your capital gains in retirement. One of the best ways to do this is through a self-directed IRA, a type of individual retirement account that can hold many alternative investments which may be prohibited from standard IRAs. Whereas regular IRAs are typically limited to conventional assets (stocks, bonds, certificates of deposit, and exchange-traded funds), self-directed IRAs are allowed to hold alternatives like real estate, commodities, precious metals, tax-lien certificates, and more.

From there, do your homework on exactly what your IRA can hold and what is the right fit for your goals and risk tolerance. Overall, you’re looking for assets that can provide diversification, supplemental income, inflation hedging, or all of the above.

For example, it’s a good idea to invest in blue-chip art for this purpose. It has very low correlation to the stock market, and has long been relied on as a value store and inflation hedge. A Rothko, for example, is still a Rothko no matter how the stock market ebbs and flows. Better still, our platform allows members to purchase shares in authenticated blue-chip artwork, sort of like buying stocks in a company, so that you can collect dividends when we make a sale.

There are two things to be aware of with blue-chip art. First, it pays to work with professionals who have art relationships, since art sales often happen based on personal relationships (that’s where our team can help you). Second, art cannot be held in IRAs.

Once you have your inflation hedges, you should diversify with a reliable source of investment income. The best option for many investors is real estate, since you can generate rental income. If you don’t want the hassle of being a landlord or don’t have the funds to purchase an entire building for rent, look into real estate investment trusts (REITs).

Ready to Invest in Your Financial Future?

Alternative investment retirement portfolios can be a good idea for savvy investors. But first, you need the right tools for the job. That’s where we make it possible for ordinary investors like you to participate in blue-chip art investing—and build the financial future you’ve been dreaming of. Ready to get started? Fill out your membership application today to learn more.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.