What are IRA, 401k, and HSA Alternative Investments?
Alternative assets – which your Checkbook IRA, Checkbook 401k, Checkbook Defined Benefit Plan, and Checkbook HSA can invest in – are all investments other than stocks, bonds, and mutual funds available through a brokerage account. A comprehensive list of alternative assets does not exist because the possibilities are endless and new strategies are constantly created. However, we can contrast the characteristics of alternatives and traditional assets and provide examples of popular alt investments.
Stocks, Bonds, and Mutual Funds: Risk, Return, and Volatility
The stock market as whole has historically provided returns averaging between seven and ten percent – over time. Those returns, however, have been associated with incredible volatility with markets plunging by as much 40% at times. Although stock market investments provide liquidity and can readily be converted to cash, if you need that liquidity when the market is down you’ll have to take a substantial loss. Think about 2008.
Bonds and fixed-income instruments with high credit ratings present less volatility, but returns on those investments are low. In a traditional portfolio, bonds and cash equivalents are used to avoid stock market volatility when the investment horizon is either short (5 years or less) or intermediate (10 years or less).
The performance of individual publicly traded equities can outperform or underperform the market by many multiples. Stock-pickers and market-timers have at times done incredibly well and mutual funds emerged so that retail investors could benefit from the abilities of professional investment management. However, studies of actively-managed investment performance have demonstrated that the overwhelming majority of actively managed funds underperform the market over time.
Scholarly theories that explain why stock-picking and market-timing generally do not work are the efficient market theory, the random walk theory, and irrational exuberance. To add insult to injury, retail investors pay huge premiums to invest in strategies that consistently do not work. Wall-Street and its agents have well-developed methods of compensating themselves using hefty commissions, expense loads, 12b-1 fees, trailers, contingent deferred sales commissions and other fees that most investors don’t realize they are paying. In addition, taxes on realized gains in an actively traded portfolio create further drag on investment returns that is compounded over time. Once your investment has been reduced by all those expenses, the only way fund managers can hope to beat the market is by taking excessive risk – and it has been conclusively proven that the odds are overwhelmingly against those funds and their investors.
With all those fees being paid by retail investors, it would be reasonable to think that Wall Street firms aim to give you the best advice money can buy – well, think again. In the early 2000s, the CEO of Merrill Lynch publicly apologized for the firm’s misleading of its retail investor clients, paid a $100,000,000 fine to avoid criminal charges for those indiscretions, and a Managing Director and senior research analyst was charged by the Securities and Exchange Commission, the SEC, with multiple violations.
Alternative Investments: Invest in what you know
There have been only a handful of active investors that have outperformed the market over time and all of them are proponents of some variant of a single strategy: invest in what you know better than others. The only way to achieve high returns and safety is to take advantage of opportunities that you have or recognize and others do not. Publicly traded securities are constantly analyzed by millions of investors and the price of a security represents the market consensus on its risk-return profile. Investments that are outside of the public market that are not subject to competition and scrutiny still present opportunities that have low risk relative to their rewards.
Alternative Investments: Diversification, Market Risk, and Non-Correlated Returns
Diversification is the hallmark of risk reduction when investing in the stock market. However, diversification within the stock market does nothing to protect you from Market Risk – the risk that the overall market will perform badly. Even the most well-diversified stock portfolio suffered massive losses during The Great Recession and stock market crash of 2008.
A truly diversified portfolio will be invested in assets whose performance are either not tied to the stock market, Non-Correlated Assets, or assets that perform well when the stock market drops, Negatively-Correlated Assets.
Use Your Check-Book Control Retirement Account to Invest in Alternatives
The large financial institutions that profit from the public market have created the false impression that IRAs, 401(k)s, Defined Benefit Plans, SIMPLE-IRAs, SEP-IRAs, HSAs, Educational IRAs and other tax advantaged accounts can invest only in public securities. There could be nothing further from the truth. Properly structured, your tax advantaged accounts can be invested in infinite asset classes from which Wall Street does not profit.
Private investments can provide you with high equity-like returns and low bond-like risk. When you invest in what you know and with those that you know risk is mitigated and returns are multiplied.
Examples of popular CheckBook Control Investments are: