Alternative Investments for Retirement. Good Idea or Bad?

October 12, 2021

Considering alternative investments for retirement? Here’s what you need to know before you get started.

While there are a lot of strategies out there to invest for your golden years, they often come back to the same central tenet: take more risks when you’re young and taper down on risk as you get older.

But what does that mean about investments with a risky reputation, like alternative investments?

Here’s a closer look at whether alternative investments for retirement are a good idea, how to assess the risks, and where you might get started with alternative investments.

What are Alternative Investments?

Don’t let the phrase throw you off—alternative investments are simply any investment asset that doesn’t fit into one of the three conventional categories (stocks, bonds, or cash). In other words, anything that isn’t stocks, bonds, or cash is technically an alternative investment. That’s a huge variety of assets, and it includes things like:

  • Fine art
  • Private equity
  • Hedge funds
  • Private debt
  • Precious metals
  • Real estate
  • Derivatives
  • Cryptocurrency

Traditionally, alternative investments were reserved for individuals who qualify for the phrase “high-net-worth” (generally, someone with at least $1 million in liquid assets) or institutional investors (legal entities participating in the financial market, such as banks, hedge funds, insurance companies, or pension funds). This is for two reasons.

First, historically, these were the only investors who met the criteria to be accredited investors, i.e. the only individuals allowed under federal securities law to participate in certain securities offerings due to their financial sophistication and capacity to weather losses that could be incurred in a riskier investment.

Second, historically, these were the only investors who could afford to buy into the market. In the past, if you didn’t have a few million dollars you could live without, it would be impossible to buy blue-chip art or investment real estate.

Nowadays, though, that conventional wisdom (and legal restriction) is changing. For one thing, the SEC modernized its definition of accredited investor to reflect clear measures of financial sophistication rather than just wealth (after all, money does not buy brains). For another, there are now innovations and tools on the market that make it possible for average investors to afford to buy into alternative investments—chief among them is the concept of crowdfunding, which allows investors to buy shares of an expensive asset they couldn’t afford on their own (like buying stocks instead of buying the company).

Advantages of Alternative Investments

What’s all the fuss about? Well, alternative investments are growing in popularity among ordinary investors (and have long been popular among extraordinary investors) for a few reasons:

  • Low correlation to the stock market and traditional investments
  • Hedge against inflation
  • Potential for greater rewards

For most investors, the big draw is the low correlation between alternative investments and traditional investments. These assets often retain their value regardless of stock market performance, either because their value is based on intrinsic qualities (as in the case of art) or because they are designed to profit regardless of how the market performs (as in the case of hedge funds).

Should You Use Alternative Investments for Retirement?

So, should you use alternative investments for retirement? Yes—if they’re a minority in your portfolio.

You may hear stories about people getting rich off of cryptocurrency or earning a record-breaking auction sale from a Da Vinci painting (yes, that crisp $450 million for Salvator Mundi goes down easy). However, the reality is that most people will not get rich on alternative investments—at least, not ordinary investors. The ones who see millions off a single transaction are usually the ones who already had millions they could afford to toss around (that investor who broke records with Salvator Mundi thought he got ripped off when he bought it—he paid $127.5 million only to learn the dealer paid $75 to $80 million for it).

For the average investor, alternative investments should be a minority asset class in your portfolio. They’re a diversification tool to protect against market volatility. They’re a hedge against inflation. Some of them can even earn you ongoing income, and plenty of them can grow your wealth over time if you’re smart about using them.

But when you need retirement assets you can count on to enjoy your golden years, alternative assets should not be the backbone of your portfolio.

How much is the right mix? For that, it pays to do your homework, chat with a financial adviser, and diversify the alternative investments you throw into your portfolio. It varies based on your time horizon, but experts generally agree that you would need a portfolio with 10% to 20% alternative assets to see a demonstrable difference.

Ready to Invest in Your Financial Future?

Alternative investments for retirement aren’t the golden bullet, but they can certainly strengthen your portfolio. The key is figuring out where to get started—and that’s where we can help.

At Masterworks, we believe the exciting world of blue-chip art investing should be open to everyone. That’s why we make it possible for regular investors like you to purchase shares in multi-million-dollar artwork (after our expert team does research on growing artist markets and handles the authentication and purchase, of course). Then, you hold onto your shares until we sell and collect your dividends from the sale. Ready to invest in your financial future? Fill out your membership application today.

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.