Alternative investment can play a crucial role in creating the retirement corpus. In fact, clients may be better positioned to achieve their investment goals, especially creating and maintaining wealth for generations through alternative investments, according to a white paper by David Adler, Senior Advisor to XA Investments LLC.
Why? Alternatives may offer uncorrelated sources of returns and potentially higher yields than traditional investments.
The retirement corpus may come from various traditional sources, typically from personal savings, investments in mutual fund schemes, annuities and pension plans.
However, these investment strategies may no longer be as effective as they once were, given the rate of inflation and unpredictability in terms of longevity.
In addition, wealthy retirees require to maintain their pre-retirement consumption patterns along with additional medical bills and pursuing hobbies that may be costly; alternative investments may provide the enhanced yields to such individuals.
Alternative investments can also provide income diversification, so the retiree is less dependent upon the viability of a single insurance company or exposed to the duration risk inherent in traditional fixed income instruments.
By broadening their investment mix to include alternative asset classes, investors have the potential to both increase returns and decrease risks.
Alternatives have demonstrated moderate-to-low correlation to traditional asset classes, therefore, the inclusion of alternatives can have a powerful effect on an investment portfolio by muting return volatility.
The addition of alternative asset classes can improve retirement outcomes, by capturing diversification benefits such as reduced volatility and higher total returns.
The diversified portfolio can reduce volatility, increase the expected returns and lower downside risk.
According to the White Paper, a study found that including alternative assets lowers the probability of depleting assets over a long retirement horizon.
Armed with the benefit of this research, advisors can begin engaging their clients in a conversation about increasing portfolio allocations to alternative investments.
For advisors who want to speak with their clients about the benefits of alternative investing, the questions below will help get the conversation started:
- If you live to be 100 years old, will your retirement portfolio fully support you?
- Do you plan to leave a bequest or make a sizeable donation?
- Would you ever need to sell all of your assets on a single day? Do you need a 100% liquid portfolio?
- Is your current retirement income sufficient to meet all of your lifetime income needs?
- Is your retirement portfolio diversified enough to protect your current lifestyle?