During the Global Financial Crisis from 2007-2009, the mechanics of the underlying market began to change. Central banks implemented quantitative easing (QE) programs worldwide to keep banks afloat and the markets on the up and up.
These programs worked wonders initially, spurring a long-standing bull market that was met with continued QE any time the market threatened to pull back. The most recent QE program was initiated as the 2020 pandemic settled in.
While other sources can cause temporary market downturns, there is no question about it; the world revolves around money. So, what happens when unprecedented amounts of cash are poured into the system to solve relatively small problems compared to what the world faces today? The answer is volatility and high asset prices.
How Volatility is Driving Alternative Retirement Investment Options
Simply put, the more volatile a market, the more diversification your portfolio may require. Volatility can introduce risk in the form of price fluctuations. So, retirement portfolios holding the traditional 40/60 ratio of bonds to stocks may be at risk of losing more money in a downturn than ever before. The mechanics behind this added risk can be complicated and may involve the flood of money into these traditional assets, raising their prices, and increasing their volatility.
One way to think about the situation is if a share of the S&P 500 was valued at $2,000, a 1% move would change the value of $20; and, if a value of the share reaches the $4,000s, a 1% move would be twice that amount. So, a $100,000 investment in the S&P 500 today may be more likely to lose twice as much as it would just a few years ago in a standard 5-10% correction. Then, if you take into consideration the volatility factor, it could potentially be a recipe for disaster in a retirement portfolio.
Alternative Retirement Investment Options
While some investment advisors continue to make the recommendations they have been pushing for decades, more investors are learning that alternative investment products can be invested in IRAs and other tax-advantaged1 accounts.
In an effort to reduce the risk of being involved in the volatility, many people are moving money out of the stock markets and into alternative retirement options, like real estate, precious metals, private equity, cryptocurrency, and other growth vehicles.
Unlike the S&P 500, a real estate investment is less likely to get a 50% haircut if you are invested in a sought-after area. Additionally, by moving your assets away from the traditional market structure, you may be able to diversify your holdings further.
An option you may want to consider is asset diversification. Using alternative retirement options can serve as a good way to hedge your portfolio against the likelihood of a market downturn that may not resolve itself in time for retirement.
For example, your portfolio could include options like timber rights. Commodities tend to do well when the market goes south; should tech stocks plummet, the income that could be made off of timber rights could potentially increase with the price of lumber.
There are so many ways to get creative with your portfolio using alternative retirement options. Digital Trust offers a range of alternative retirement plan options, including self-directed IRAs and solo 401(k) plans for self-employed business owners with no employees. Plus, easy sign-up options help you begin pursuing alternative investments to diversify your IRA2.
1Some taxes may apply. We recommend you consult your tax, legal, and investment advisor.
2Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The account holder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.