Alternative Investing: It’s for “Normal” People, Too
I recently came across an interesting blog on Two Cents, called The Normal Person's Guide to Alternative Investments. The blog highlights a point we often talk about at PENSCO — that alternative investments are no longer an exclusive or obscure asset class available only to institutional investors or ultra high net worth individuals. Rather, alternative investments are a tool that all investors can use to diversify their portfolios, which can come in handy in today's volatile market environment.
But, there is still a lot of confusion surrounding alternative investments. While many investors are not quite sure what they are, the definition of an alternative investment is pretty straightforward: Alternatives are simply any investment that is NOT made up of stocks, bonds or cash, and is not normally traded on an exchange.
Alternative investments can include:
In addition, recent regulatory changes have allowed investment platforms to offer everyday citizens the opportunity to invest in startups and pre-IPO companies, which now means millions of investors can participate in private equity and alternative investing.
But there’s another reason this blog caught my eye — it discusses using alternative investments as a means of diversifying a retirement portfolio that is invested in exchange-traded assets like stocks and bonds.
Here is an excerpt from the blog by contributing writer Kristin Wong:
"Let’s say you’re invested long-term for your retirement. You have a 401(k) that does all the work for you, or you have a fair mix of stocks and bonds in mutual funds. Either way, you’re already doing pretty well for yourself.
As your net worth grows … you want to diversify it even more. A properly diversified portfolio includes different types of stocks and bonds—international stocks, for example—and it also includes something called alternatives."
Many investors do not realize that they can invest in alternative assets using retirement funds. But to do so, you need to work with a custodian that allows you to self-direct your IRA retirement dollars into your chosen alternative investment, such as a rental property or a startup company.
At PENSCO, we help clients who want to hold alternative assets in their self-directed IRAs. Our job as a self-directed IRA custodian is to work with you through the complexities of self-directed IRA ownership. We also encourage you to learn about pitfalls, such as fraud and prohibited transactions, and to consult a financial professional to determine if investing in an alternative asset is right for you.
Besides offering the potential for diversification, investing in alternatives with a self-directed IRA can come with tax advantages. Earnings in a traditional IRA can compound year after year on a tax-deferred basis and can grow that way until required minimum distributions must start when the account holder is 70½. By investing in private equity with a Roth IRA, account growth accumulates tax-free.
Penalties may be incurred for withdrawing from a Roth IRA if it does not satisfy the rules for qualified distributions from a Roth IRA. You should consult with your tax professional to determine the most appropriate investment options for you.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.