Alternative Investments

2022 continued to teach us that a traditional 60/40 Stock and Bond portfolio is not diversified enough to rely on. Stocks and Bonds plummeted at the same time, and if this was early in retirement, you may have had nowhere to draw income.

Early in retirement, this can lead to "sequence of returns" risk. The issue arrises that drawing income when your portfolio is down 30% means cashing out at 70 cents on the dollar and losing decades of compounding on the difference. This can KILL a retirement nest egg.

What are some solutions?

1. Cash Wedge. One simple strategy is to carry a cash balance that is stable and can be drawn on for early retirement. The trade off is this will likely also limit returns.
2. Work longer.
3. Alternatives. Things you can own that are not stocks or bonds

Alternatives

Private Real Estate

Your Principal Residence is certainly part of your portfolio. You may also own rental units personally or in partnerships - this requires good credit, legal and tax structure (semi-passive). Or you can own shares or units of private real estate through a fund structure.

Private Equity

This includes the family business or other business interests - tax planning is huge here. Private equity can also be owned through a fund for a more passive approach.

Private Credit

Private mortgages are unique and are not subject to interest rate changes. They also come with an increased yield and complexity. Again, these can be owned directly or in a fund structure.

Derivatives

Some long-short hedge fund strategies march to the beat of their own drum that is completely unique. These are hard for most investors to find access to, but can be found as components to some portfolio solutions.

Commodities

Metals, minerals, and other important ingredients to society. Commodities are not always meant to act as a long term investment, but rather a unique part of the portfolio that goes up at the right time to buoy the portfolio. Can be owned directly or through funds.

Portfolio Solution

For most Canadians, this is a great choice. A portfolio solution will wrap the best of traditional and alternatives into a portfolio that investors can then buy units of. Fees can be very competitive in this space and it makes for a simple and elegant solution.

Fine Art, Wine and Spirits

Alternatives expand into other areas including owning shares of famous art, and cellared wine and whisky. These are emerging as options to public investors.

Retiring into uncertain times requires hedging your bets with more diversification and it is worth it to start checking out alternative investment ideas.