By Thomas J. Powell
Stocks, bonds, and other “traditional” securities may dominate many portfolios, but for growth-minded investors looking to invest their retirement plan assets, alternative investments continue to gain an edge. The vast range of alternative investments includes just about anything that does not fall into the categories of publicly traded stocks, bonds, and mutual funds. For example, real estate and commodities (including oil and gas, venture capital, derivatives, and direct investments in business) are all increasingly attractive landmarks on today’s investment landscape. So, why are people breaking tradition and getting on board with alternative investments now more than ever? Below is a brief look at some of the probable reasons why more investors are putting their retirement funds to work in alternative investments rather than sticking with the traditional.
Simply put, when someone says “stock market,” the next word that springs to mind is commonly th word “volatile.” Economists will always struggle to pinpoint exactly what causes such abrupt shifts in the market as there is certainly never just a singular reason. Between issues like politics, wars, debt crises, investors get skittish and, as a result, pull their money out of the market. The flipside can, and certainly does, lead to some wild and sudden gains in profits for some investors, but the underlying uncertainty in either direction gives many growth-seeking retirement-focused investors plenty of compelling pause.
Private Companies are Staying Private
The Wall Street Journal reports that a record number of billion-dollar businesses are remaining private, rather than opening themselves to the risks and significant expense of public trading. It takes a lot of time and money for a business to go public, and at least as much patience for dealing with the accompanying regulatory hurdles and public scrutiny. Thus, armed with lessons learned from the poor decisions and nearsighted blunders of trigger-happy IPOs of the past, far more companies are saving themselves for further maturity before going public. Everyone hears about the sensational Silicon Valley-type mega-success stories, but due to the financial structure of those venture capital-driven companies, if you planned on cashing in big off of their IPOs, you had to have been invested nice and deep during their private days. In fact, that’s the alternative investment strategy that helps the pockets of those venture capitalists get so deep.
Making the Purse Diverse
Even investors who happily anchor their portfolios in the seemingly safe harbor of stocks and bonds are increasingly wary, both of the stock market’s shifty tide and ebbing yields on bonds. Worldwide, wealth is rising and newer global investors expect more avenues to channel their growing assets into than just traditional markets in different geographies, which are often prone to following each other’s paths. The answer? Diversification. In 2015 and beyond, you can expect alternatives to gain an even stronger foothold on the global investment front.
Direct Investment Just Got a Whole Lot Easier
In just the past few years, new decisions, rules, and policies from the SEC and IRS have opened doors for considerably more private placement and direct investment across multiple industries, which comes to the tremendous advantage of investors. In 2014, Rule 506(c) of SEC Regulation D allowed private companies to market to accredited investors via “general solicitation.” Similarly, the IRS has added massive tax benefits to the U.S. tax code, which generously incentivizes direct investment, especially in domestic energy exploration and resource extraction (in areas like oil and gas drilling). These circumstances offer higher returns on investments in bigger slices of a company’s pie (with some of them bolstered by tax breaks), in ways that are simply not possible via traditional models.
To sum things up, there is a growing contingent of investors who are dissatisfied with waiting around for returns on traditional investments and who are keen on exploring the prospect of putting retirement funds to work in alternative investments. If you are one of them, consider engaging some professional assistance to find a solid plan that works with you and your IRA.
Please note: Provident Trust Group does not endorse contributing writers and have solely partnered with them to create educational content.