Yahoo Finance Should You Consider Alternative Investments If You’re a Senior?
As a lifelong real estate investor, I obviously love alternative investments outside the traditional gospel of paper assets (stocks and bonds). But that doesn’t mean they’re a great fit for everyone.
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So how do you know if they belong in your portfolio as a senior?
Consider the pros and cons of each of these alternative investments to decide for yourself if one or more of them fits your goals.
Alternative Investments To Consider as a Senior
Before diving in, note that I didn’t classify annuities as an “alternative investment.” As insurance policies, you can argue about whether they count as investments at all, and they fall within the mainstream dogma of retirement planning.
Real Estate
I’ve owned dozens of rental properties over the last two decades. They come with some compelling advantages: inflation resistance, ongoing income, outstanding tax benefits and the ability to leverage other people’s money to build your own portfolio of assets.
Consider that latter in more detail for a moment. Imagine you buy a property that rents for $1,000, with a $500 mortgage and $400 in non-mortgage expenses (vacancy rate, repairs, maintenance, property management and so forth). In the first year, you collect $100 in average monthly cash flow. At the end of it, you raise the rent by 5%. But your cash flow jumps by 50%, from $100 to $150. (That’s not entirely accurate, as some expenses rise alongside rents, but you get the idea: leverage modifies the math.)
That said, rental properties come with real downsides. They require labor and skill to buy, and ongoing labor to manage. They also require a high minimum investment in most cases, and they aren’t liquid. Plus, all that lovely leverage adds not-so-lovely risk.
But it turns out that you don’t actually need to become a landlord to get all the investment benefits.
Learn More: How I Made $1,000 a Month in Dividend Stocks
Private Equity (Real Estate or Businesses)
I no longer invest in rental properties personally. I invest in private equity real estate syndications: group investments where I just invest money as a silent partner.
As a “limited partner,” you get the investment benefits of real estate — cash flow, appreciation, tax advantages — without the headaches of buying or managing properties. Most target high annualized returns to entice investors, typically mid-teens or higher.
You aren’t limited to real estate either, as you browse private equity investments. You can invest in small businesses from car washes to urgent care facilities and beyond.
And, of course, these investments too come with cons. They are not liquid, usually requiring a long-term commitment from three to seven years. Private equity typically requires a high minimum investment, $25,000 to $100,000 or more (unless you invest through an investment club). These investments range in risk as well, from moderate to high.
Secured Debt
I like secured debt investments too. These loans or notes are secured with a lien against real property as collateral, reducing the risk (at least in theory).
They pay ongoing interest income, and the risk can be relatively low if they’re secured against a property with plenty of equity. For example, I recently invested in a secured note paying 10% interest, and the collateral property is worth more than double the debt. The borrower stands to lose $175,000 in equity if he defaults.
You don’t have to know the borrower personally to invest in secured debts. Platforms like Groundfloor offer these investments — I’ve invested five figures with them, and they’ve averaged 10% annualized returns since 2013.
Again, watch out for the lack of liquidity, and learn how to analyze risk before investing.
Precious Metals
Gold, silver and other precious metals can add diversification and defensive protection to your portfolio. If a shock or crisis hits financial markets, many investors consider precious metals a safe haven.
Gold has performed better than you might expect over the last half-century. Since 1971, it’s delivered an average annual return of 7.98%. But precious metals don’t generate cash flow, so you only collect returns by selling.
Don’t put your entire nest egg in, well, golden eggs. Still, precious metals can add another dimension to your portfolio, and protect it against market crashes.
One More Thing
Notice anything missing from this list?
Cryptocurrency doesn’t make an appearance, because it’s both volatile and speculative — both huge red flags for retirement investments. Crypto doesn’t generate revenue and has no measurable inherent value.
Consider diversifying your portfolio to include some of the alternative assets above. But don’t put too much money in any one asset: Maintain a diverse portfolio that can weather bear markets and bull, and won’t leave you penniless when the next market crash comes calling.
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This article originally appeared on GOBankingRates.com: Should You Consider Alternative Investments If You’re a Senior?
