Baby Boomers, born 1946-1964, outnumber all other generations in U.S. history, at 76 million people. This most influential group controls around 70% of the nation’s total net worth. However, Boomers’ investment portfolios tend to be heavy in low-risk assets like bonds and cash and higher-risk assets such as stocks and stock funds, a strategy unlikely to sustain retirees for the duration. Adding a few alternative investments to complement stocks, bonds, and cash better diversifies portfolios, balances low-yield bonds against relatively higher-risk stocks to reduce risk overall, and increases yield.
Institutional and wealthy investors have long benefited from alternatives as hedges against market down turns. New investing vehicles now provide more modest investors access to these alternatives. CFO magazine cites a report by McKinsey & Co., “The compound annual growth rate of alternative investments was 10.7% from 2005 through 2013, almost twice the 5.4% CAGR racked up by traditional asset classes, according to McKinsey.”
Here are some of the more attractive alternative investments for Baby Boomers.
- Long-short bonds
In 2013, this category grew by 81%, with $20.6 billion net inflows. With total assets of $50 billion in 2014, this category proves to be the most popular of all alternative funds, according to Morningstar director of alternative investment products, Josh Charlson.
- Hedge funds
Alternatives, with hedge funds leading the category, were foreseen by nearly 66% of respondents to a 2008 survey of institutional investors conducted by Morningstar and Barron’s, to become as or more prominent than stocks, mutual funds, or bonds over the following five years. Now seven years later, their predictions have proven to be largely accurate, with hedge funds continuing to be highly preferred alternatives.
- Private equity funds
According to Forbes magazine, private equity funds, along with hedge funds, “Make it rain“. A benefit of private equity is that profits are taxed at long-term capital gains rates. And, reallocated amounts retain their tax definitions as capital gains instead of converting to ordinary income by paying these to fund managers as fees.
- Funds of funds (FOF)
FOFs, or multi-management funds are mutual funds comprised of investments in other mutual funds. The FOF alternative permit investors to broadly diversify and allocate assets to investment in a wide variety of fund categories all included in a single fund.
Commodities are among the most popular of alternative investments, and are good for diversification. However, the majority of commodities investors utilize trading instruments such as options, futures, exchange trade funds (ETFs), or others to access this market. Because commodities are real assets, versus shares or bonds, prices typically increase as inflation rises, making them a strong inflationary hedge for your portfolio. However, their volatility is most suitable for more aggressive thinking investors.
- Real Estate Investment Trusts (REITs)
If you’re looking to earn high income Bankrate’s relays expert recommendations to bypass the fixed-income space and consider dividend stocks and REITs. Low-cost investment in REIT Index Funds generates returns through rental income from commercial investment properties they hold. Per legal requirements, 90% of the income is passed to investors as dividends, which provide cash flow and also hedge against rising interest rates and inflation.
- Agriculture commodities
For high liquidity and simple access buying shares of agriculture-related companies can be a good alternative. For more adventurous investors not focused on liquidity, the range of accessible programs for foreign agricultural investment is increasing.
Managed futures offers an attractive alternative for many investors. Kiplinger suggests investing in futures contracts—which are contracts to sell or buy assets at an agreed price in the future—as a means to profit from price trends in other investment products, such as stocks, commodities, bonds, and currencies.
The decline of the U.S. dollar since 2002 has turned investors toward the global currency market, the world’s largest financial market. There’s abundant profit potential in this market, and with very little money, investors can start realizing great returns without any commissions. Currency trading also offers tax advantages over trading stock—the first 40% of all profits are taxed as short-term capital gains, and the remaining 60% as long-term capital gains.
- Mutual funds
A wide variety of alternative mutual funds are available, including Market Neutral, Tactical Allocation, Equity Precious Metals, Multi-currency, Long/Short Equity, Trading-Leveraged Equity. Category rankings in multiple categories illustrate this market’s attractions for investors.
- Hard money loans
For attractive yields by self-directing your retirement account, and without necessarily higher risk than incurred with traditional stock trading, investing in real-estate-backed loans can be a good choice. Among the simplest alternative investments in existence is funding a private mortgage loan. Risk is extremely low, because loans are usually provided at a maximum of 60-70% of a property’s market value.
- Emerging markets
Markets in developing countries are increasingly powerful forces of global growth. U.S. growth is exceeded by emerging markets. Citibank reports that in years to come 70% of global growth will be in emerging markets. Notwithstanding last year’s drop in this sector, which many now view as an overreaction, these markets are still considered an area of great opportunities for bargains.