For decades, affluent investors invested inalternative investment optionslike private equity, real estate and unconventional options like art. However, times are changing as more average investors are starting to invest in these asset classes.
One of the biggest reasons behind this shift is that people are living longer, with average life expectancies fluctuating around 80 years old. This figure will only increase over time, meaning that people can take more risk for higher returns. Alternative investments are also becoming more popular due to geopolitical instability and record high inflation.
Alternative Investments as 401(k) Investment Options
Joan Solotar, global head of private wealth solutions at Blackstone Inc. predicts that alternative investments will be part of 401(k) plans in the near future.
“The premise of saving for 10, 20, 30, 40 years and only having access to daily liquidity products doesn’t make sense,” said Solotar, speaking Thursday at the Bloomberg Wealth Summit in New York. “It’s a mismatch.”
401(k) plans are offered by employers to help their employees save for long-term goals like retirement. Typical 401(k) plan investments include standard stock, bond and blended ETFs. Since people are living longer, they’ll need higher returns to save comfortably for retirement.
Alternative investments likeprivate equityare generally riskier than standard stock ETFs since they have higher fees and don’t have as much oversight compared to publicly traded investments. Many private equity investments also have lock up periods, which require that you invest your money for a specific period of time.
One way to gain private equity exposure while still having liquidity and lower fees include investing in private equity ETFs. These ETFs are publicly traded and invest in companies that specialize in private equity investing like Blackstone Inc. (NYSE: BX). Some options include ProShares Global Listed Private Equity ETF (BATS: PEX) and Morgan Creek Exos SPAC Originated ETF (NYSEARCA: SPXZ).
Geopolitical and Economic Instability
Current international events like the war in Ukraine have greatly impacted the markets. At the start of the war, the S&P 500 was down roughly 3%. Not only that, but there have been more recent steep market drops like the 2008 recession and 2020 COVID-19 pandemic.
These factors have caused more advisors to start recommending alternative investments to their clients in order to diversify from traditional markets. Most alternative investments are inversely correlated with markets, meaning that they appreciate while traditional benchmarks depreciate and vice versa.
For example, the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) has decreased by about 10% since the beginning of the year. Conversely, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (NYSEARCA: GUSH) has returned 85% in this same time period.
Even just allocating small percentages of your portfolio to these sectors can help you earn higher returns to withstand market volatility and beat record high inflation, which was 8.5% in March.
Illiquidity can be an advantage to investing in alternative investments. While standard investments are more liquid, they’re also more susceptible to drops from panic selling. Panic selling has a much smaller impact on more illiquid investments, resulting in less steep declines.
Alternative Investments like private equity or real estate aren’t just for the wealthy as more everyday investors are starting to invest in these sectors. Investors will continue to live longer, making it more important to find ways to earn higher long-term returns and diversify portfolios from traditional stock markets. Some other significant factors behind the rise in alternative investments include heightened geopolitical turmoil like the war in Ukraine and high inflation.
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