Investor Insights Blog|Alternative Investments Demystified: Pros, Cons, and How to Get Started
Self-Directed IRA Concepts
Alternative Investments Demystified: Pros, Cons, and How to Get Started
When it comes to investing, most people are familiar with traditional investments such as stocks, bonds, and mutual funds traded on public markets. However, there is another category of investments known as alternative investments or private market investments that are becoming increasingly accessible to a wider range of investors.
Alternative investments defined
Alternative investments are assets that fall outside the realm of traditional investments. These investments are typically found in private markets and include asset classes such as real estate, private equity, hedge funds, commodities, cryptocurrencies, and precious metals. These investments often have unique characteristics and risk profiles that differ from those of traditional investments.
How to buy alternative investments
Investors can access alternative investments through various means, but generally there are two methods:
Inside a taxable account: Investors can purchase alternative investments directly through a taxable brokerage account.
Inside a tax-advantaged retirement account: Investors can also hold alternative investments within their retirement accounts, such as an IRA. A self-directed IRA, as it’s known in the industry, is an account held by certain custodians who custody alternative assets in retirement accounts. Equity Trust is one such custodian.
Many investors find it beneficial to invest in alternative assets with a retirement account because of the tax advantages. With a Traditional IRA, contributions are tax-deferred; with a Roth IRA, contributions are made after-tax, with tax-free withdrawals if you meet certain requirements. In both accounts, you’re not taxed on any capital gains generated from investments inside the account.
Even though alternative assets may be held in retirement accounts, it’s important to note that there is a small list of investments that are prohibited within these accounts, per IRS rules.
Video: What Are Alternative Investments
6 popular types of alternative investments in an IRA
Here are some of the investments that may be held in a retirement account:
Real estate: Investors can invest in real estate through direct property ownership, real estate investment trusts (REITs), or real estate crowdfunding platforms.
Promissory notes: These are written promises to pay a specified amount of money to the lender over a set period, often with a fixed interest rate. Investors can use promissory notes to loan money from their retirement accounts.
Private equity: This involves investing in privately held companies, often through private equity funds or direct investments.
Crypto: Investors can gain exposure to cryptocurrencies either by purchasing them directly or through exchange-traded funds (ETFs) that hold crypto assets.
Gold: Investors can hold physical gold or invest in gold-related assets such as gold mining stocks or gold ETFs.
Silver: Like gold, investors can own physical silver or invest in silver-related assets.
Pros and cons of alternative investments
Pros:
Improved diversification: Alternative investments can help diversify a portfolio beyond traditional assets, potentially reducing overall risk.
Potential for higher returns: Some alternative investments may offer higher returns compared to traditional investments, albeit with higher risk.
Hedge against inflation: Certain alternative investments, such as real estate and commodities, can serve as a hedge against inflation.
Cons:
Less liquidity: Many alternative investments are less liquid than traditional investments, meaning they may be more difficult to sell quickly or at a fair price.
Increased complexity: Alternative investments often have more complex structures and risk profiles, requiring a higher level of due diligence and understanding.
Not suitable for everyone: Due to their unique characteristics and risks, alternative investments may not be appropriate for all investors.
Who can invest in alternative assets in an IRA?
Anyone with an IRA can potentially invest in alternative assets, provided it’s held at a self-directed IRA custodian equipped to handle the investments. To open an IRA, you must first have earned income. Learn more about qualifications for an IRA.
Some types of alternative assets, such as private equity, had long been reserved for only accredited investors or the ultra-wealthy. In recent years, however, these investments have become more accessible to the average investor through various investment platforms and vehicles.
As with any investment, it’s essential to consider your risk tolerance, investment goals, and overall financial situation before allocating funds to alternative investments within your IRA.
Getting started with alternative investments with an Equity Trust account
You can begin investing in alternative investments in a retirement account in just a few steps with Equity Trust. It’s important that you have your account open and funded before you locate an investment; depending on your funding method, delays may cause you to miss out on your investment opportunity.
Here’s how to get started:
Open and fund an Equity Trust account: One of our specialized counselors will walk you through the process, or you can do it online with myEQUITY. You could fund an account by rolling over an old 401(k), transferring an IRA, or making an out-of-pocket contribution.
Direct Equity Trust to fund your investment: Easily initiate your investment with our online account management system myEQUITY. Our liaisons are here to help you if you need it.
Learn more about alternative investments
Looking to dive deeper into investments beyond traditional options? Watch this free, on-demand webinar to learn more about making alternative investments part of your strategy.
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