Alternatives can play a key role as powerful diversifiers in your overall portfolio, and holding alternatives in your IRA can add the benefit of tax-free growth over time. Here are five reasons to discuss the possibilities with your advisor:
Alternatives are part of a large and growing asset class.
Alternative assets—a class that includes hedge funds, private equity, real estate, commodities, marketplace lending and crowdfunding—are on the rise. In 2004, $2.5 trillion was invested in alternatives. By 2012, that figure had more than doubled, to $6.4 trillion. And by 2020 it's expected to reach upwards of $13 trillion.1
This growth presents an opportunity for investors, for whom alternatives are likely underutilized: The mean allocation of alternatives by advisors is still less than 5% of overall assets.2
Self-directed IRAs are suited to hold alternatives.
The tax benefits provided by self-directed IRAs can make them an excellent vehicle for alternatives. But Millennium Trust research shows that even investors who own alternatives in brokerage accounts often don't own them in IRAs. For example, while 37% of high-net-worth investors in the study invest in real estate, only 10% do so within an IRA.
To learn what’s allowed in self-directed IRAs, see IRS Publication 590A.
Alternatives may help your financial advisor use risk to your advantage.
In the face of unstable geopolitics, changing tax policies, a barrage of central bank decisions and other variables, deep investment diversification is generally critical to managing market risk.
Alternatives may be a particularly effective ingredient, since they have a low correlation with other asset classes and may provide a ballast during volatile times.
Alternatives have matured and moved into the mainstream.
While alternatives have long had a reputation for being risky, in reality they constitute a diverse asset class with a broad range of attributes and varying degrees of risk. Customized to complement your overall portfolio, they can help soften the impact of volatility and, when held in a tax-deferred account like an IRA, can provide opportunities for outsized tax-deferred growth.
Alternatives are not as hard to access as they once were.
The process of investing in alternatives is also becoming easier, as new online investment platforms allow advisors to access a variety of alternative investment opportunities without the burden of complicated paperwork.
Most investors have a long way to go before they are fully diversified, but the more assets they have, the more likely they are to devote a higher percentage to alternatives. One survey showed that ultra-high-net-worth investors devoted 46% of their portfolios to alternatives, compared to 22% for certain high-net-worth investors.3
Every investor has her/his own considerations at play in finding the right asset allocation. You should discuss with your financial advisor the level of risk associated with each particular alternative asset type to determine if alternatives are right for you.
Maintaining the right mix of traditional and alternative assets can help you capture attractive total returns without taking on undue risk. Ask your financial advisor to connect with a custodian with expertise to make the process of opening and maintaining a self-directed IRA easier.
Millennium Trust Company performs the duties of a directed custodian, and as such does not provide due diligence to third parties on prospective investments, platforms, sponsors or service providers and does not sell investments or provide investment, legal or tax advice.
1PWC, "Asset Management 2020"
2Cerulli Associates, "U.S. Alternative Products & Strategies 2016"
3KKR, "The Ultra High Net Worth Investor"