Alternative Investments – Are They Right For You?

Given the chaotic financial environment we have experienced since the start of the COVID pandemic, the stock market has been on a wild and crazy ride. Dips as low as 40% followed by all-time record highs as well as everything else in-between.

In this current environment, investors are looking for investments that are not related to the stock market and can generate returns that further boost portfolios. To meet this objective, more and more attention is being turned towards alternative assets.

What Are Alternative Assets?

Alternative Assets are basically any investment that does not fall into 1 of the traditional asset class of stocks, bonds, mutual funds, ETF’s, cash, and cash equivalents. This asset class can include but is not limited to:

Alternative Investments

  • Real Estate
  • Commodities such as precious metals, oil, gas, timber, etc.
  • Art & Collectibles
  • Side Business
  • Person-to-Person (P2P) Lending
  • Master Limited Partnerships
  • Venture Capital Funding
  • And much more!

As I wrote in a previous post here, modern investors are turning more and more to alternative assets to improve overall returns and diversify away from the stock market. This, in turn, mitigates overall portfolio risk.

In other words, alternative assets typically perform best when the stock market is down and can be not only used to offset losses, but if allocated correctly, can actually improve overall returns.

In the past, access was limited to high net worth individuals who usually fell into 2 groups: accredited investors and qualified purchasers

Accredited investors had to have an income level exceeding $200,000 for an individual or $300,000 for joint income. Another alternative would be having individual or joint net worth exceeding $1 million.

Qualified purchasers were considered sophisticated investors with an investment portfolio exceeding $5 million (either individually or jointly).

Today, that is no longer the case.

As this has become more popular, the criteria to gain entry has reduced. Sure, some investments require a person to be an accredited investor, however, more and more this is no longer becoming the norm. Nowadays, everyday people like you and I can get involved in investing in alternative assets. We’ll discuss more in detail later in the article.

Why Invest in Alternative Assets?

To understand why investing in alternative assets classes may become a consideration, let’s first discuss how people used to invest 40+ years ago.

Back then, the majority of people had a defined benefit plan (aka pension) through their employer. With a defined benefit plan, the employer basically manages the investment of the employee’s money (usually a small percentage of a fixed sum of an employee’s pay such as 3-5% per paycheck).

The employee had little direct control over their retirement since the employer did all the fund managing.

The benefit to the company was that once the employee and/or employee’s spouse (depending on if they selected an individual or shared pension plan that still paid the pension to the employee’s spouse once the employee passed away) had passed, the company keeps the remaining unspent money.

The great part for the employee was that they received a continuous stream of income every month no matter what. Put in 30+ years of service and retire comfortably on a fixed income that could support you throughout retirement…… win-win! 😊

To earn higher lifetime benefits, the employee could work longer, make a higher salary, or live longer. That was it. The employer controlled the contribution formula and what the money was invested in.

Back then, the employer had a lot of safe investments to manage the money with. As discussed in this article I posted, bonds and T-Bills were providing a return of 6-14% in the past so all they had to do was load up on bonds and T-Bills and let the money grow!

On top of that, the average life expectancy was about 71 years and many employees retired at age 65. In general, companies only had to fund retirement for, on average, around 6 years and they were off the hook.

What happened to break this system? …… inflation and debt obligations

The 70’s was a time for extremely high inflation and companies were struggling to find ways to invest money to keep up with this runaway inflation.

A government rule that also plagued companies was that they had to keep enough money set aside to protect retired employees if if the company floundered or even went bankrupt, the retirees had a protected pension.

This prevented companies from reinvesting this money when things became tight and was a sunk cost to the company.

On top of that, people started to live longer… a lot longer. Today’s average life expectancy is about 79 years and climbing. It is not unheard of for people to live well into their 90’s. Since 1980, the number of people living to age 90 and beyond has tripled and climbing.

This puts a lot of additional pressure on the pension funds to continually deliver returns to meet obligations. Compound this with yields being reduced on “safe” investments over the last 10+ years and a huge strain has been placed on the pension system.

The 1st stone to drop was in 1978 when Congress passed the Revenue Act of 1978. This act created the defined contribution plan. This is better known as a 401K in the private sector and 403B in the public sector.

Employees would now be able to contribute and manage their own money in tax-advantaged accounts to supplement their pension plan. Employees could save additional income for retirement and live the life that people only dreamed about.

Picture this, having a consistent income stream coming in every month that met your living expenses and THEN use the 401K money to buy a 2nd home, go on lavish vacations, and live a great retirement!

Unfortunately, the real result has been that over the past 40+ years pension plans have slowly gone away and managing retirement funds has shifted from employer to employee.

Today, 69% of employees contribute to a defined contribution plan only, 7% in a defined benefit plan only, and 24% are contributing to both.

The sad reality is that 401K’s and 403B’s were NEVER designed to fully fund an employee’s retirement. Plus, putting the onus on employee’s who have no financial education vs a company that can hire a team of financial professionals has also sustained the emergence of the financial planners to help employees manage their funds.

So how can we use this information to our advantage?

When designing your portfolio, a budget at retirement is needed. This way living expenses can be estimated and then figure out how to generate consistent income streams to cover these basic living expenses.

In other words, let’s use this information to create our own pension that covers basic living expenses and lets the funds from your 401K cover everything else.

A potentially great tool to creating this pension could be using alternative asset investing.

How to Use Alternative Investments to Create a Pension?

When used properly, alternative asset investments can provide a steady income stream that is NOT dependent on the fluctuations of the stock market. Let’s start with one I am currently using, have had success with, and can be a bit controversial….. life insurance policies.

Insurance Policies

Life insurance policies have a multitude of purposes. They offer protection for our loved ones in the event of death. It can offer to pay for special services in the event we are not able to conduct basic life functions or if we are hurt on the job. In other words, it is the “safety net” that allows us to perform our very best knowing our loved ones are being taken care of.

There are also other benefits that certain types of insurance policies provide that a person can take advantage of while still living!

If designed correctly, these insurance policies can provide a tax-free income stream. By building this into your retirement portfolio, a steady income stream can be created that has the benefits a pension provided. 2 popular choices are indexed universal life (IUL) policies and whole life policies.

Indexed universal life policies typically follow an index (i.e. S&P 500) and matches the performance of the index….with a difference. A cap is placed both on what can be lost and what can be earned.

For example, assuming the cap is from 0% – 16%, if the index drops 30% in 1 year, the policy is protected and you lose zip, zero, zilch, nada, nothing. However, if the index increases by 30%, your policy only grows 16%. The good news is that losses are capped in your favor, the bad news is that the gains are not capped in your favor. The result is that the portfolio should have consistently more stable returns over the life of the policy AND avoid the negative dips that can permanently damage your portfolio.

Money is accessed by taking out loans against the policy and is tax-free. Yes, I said tax-free! 😊

If the policy is designed correctly, the loans can be absorbed by the policy and will be deducted from the overall balance accumulated on the policy. In other words, you can use the accumulated policy balance now while you are alive vs giving this benefit to your heirs when deceased.

A whole life policy is similar except the rate of return is fixed (usually between 3-5% plus dividends). The good news is that loans can be taken out against the policy and used as a tax-free income stream.

These same loans can also be used to purchase other investments, such as real estate, so that your money is working for you double-time (aka The Velocity of Money). Check out this video from Garrett Gunderson to learn more about the concept. 😊

On top of that, IUL’s and whole life policies can also provide funding to pay for a retirement home in your later years in the event you are unable to perform basic living functions and need the assistance.

The con is that the rate of return is typically lower for whole life policies than IUL’s.

What makes life insurance policies unique is that these are technically NOT financial instruments, but rather legal contracts signed between the insured party (you) and the insurance provider.

There are pundits who disavow this strategy by stating that insurance policies have high fees which sap your portfolio gains and that it is much more efficient to leverage financial planners to build up your portfolio.

My counterargument is that financial planners do WAY more damage to your portfolio than insurance policies. To understand how much financial planners’ fees can sap your portfolio, read this eye-opening article from Tom Tresidder. There is a lot of good information here so take your time and read it carefully.

My other counterargument is that insurance policies are a defensive strategy to protect you and your family so that you have peace of mind (aka a safety net). This peace of mind can then help to unlock a person’s full potential which, over a person’s lifetime, can generate more money than not applying life insurance policies.


Annuities are the original pension. Insurance companies sell annuities which offer a fixed monthly payment for as long as you live.

The cons are that, to provide a level of income to meet living expenses, a large upfront sum is required. When a person passes, the insurance keeps the lump sum and is not passed onto the survivors.

Another con is that you do not have access to the principal. If an emergency comes up, you will need to use other pools of money to pay for it.

Annuities can work for you based on risk tolerances, trade-offs, and overall goals.

Real Estate

Real estate offers a plethora of opportunities for creating income streams.

First off, there are rental properties. Rental properties offer an opportunity to own a tangible asset that, except for 2008, consistently appreciates. If the deal is structured correctly, another bonus is that any leftover money is kept by you after the mortgage and expenses are paid off.

Rents also tend to go up over time while expenses remain fairly constant. Can you say, “cash cow”? lol 😊

Also, equity can be tapped into in case an emergency comes up and it acts like an “emergency piggy bank” that can be used if needed.

Worried about dealing with tenants? There are ways to resolve this. A popular option is to hire a property management company to run the day-to-day operations for you. A fee is charged for services rendered but for the benefit of freeing up your time, it may be worth it.

Ideally, find a property manager who is also a realtor so that way they have skin in the game when it comes to finding a good deal on a property.

Another disadvantage is that a large amount of upfront capital is required to make a down payment on a rental. This can be resolved if the deal is structured properly. Want to learn more about what to look for in a rental property and how to structure deals?

Do research on for more details. It is a wealth of information along with having a way to reach out to other people who have purchased rental properties and found success. Learn as much from them as possible before going off on your own.

A second method to getting real estate exposure is through online real estate platforms such as Fundrise. Fundrise allows a person to invest in real estate property while having little money and little knowledge.

The Fundrise teams does all the leg work and find properties that normally only accredited investors may have an opportunity to purchase. Fundrise looks for deals that have high upside and lower risks. They assess the business case for the property, create the deal, and manage the details. You, the passive investor, invests in the deals as you choose.

The advantage is that for as little as $500, a person can start getting real estate exposure into their portfolio and build it up over time. Plus, there are different ways to structure portfolios if interested in appreciation only, an income stream only, or a little bit of both.

The disadvantage is the invested cash is not liquid right away in case an emergency comes up. It will be tied up for up to a few years so make sure that you have an emergency fund that is sufficient to cover unexpected expenses.

Yieldstreet is another investing platform that offers alternative investment options including real estate, art, and even a fund that spreads the investment across multiple alternative investment asset classes.

I just started digging into this platform and do not yet have a lot of details. I plan to dig into these online investing platforms in more detail in a future article.

Do you have any experience with these platforms? I would love to hear from you. Reach out to me here with your feedback.

Lastly, there are also real estate syndication groups that a person can join. The philosophy is this: A person finds a great deal on a real estate investment such as a 20-unit apartment building.

This person brokers the deals, develops the business case, and find passive investors to invest the remaining money. You, the passive investor, invest your money in the deal and create an income stream. After a few years, the deal is finalized, the property sold, and you get your cash back plus appreciation.

I do not have any experience in this and see potentially a few disadvantages with it. I plan to do more research on this in the future and go though it in more detail in a future article.

Side Hustles

I’ve talked about the advantages of side hustles here and how it can speed up the path to financial freedom. A side hustle can bring in extra cashflow that can be used to pay off debt, build equity, or even have a more fruitful life.

The downside is that some side hustles take lot of upfront work and has some upfront costs. The upside can be huge and potentially provide a lifetime income stream.  Weigh the options and determine what is right for you.

What Investment is Right for You?

Stuck on how to figure out if an investment meets your particular strengths? Check out this tool from Garrett Gunderson. Use this to decide if an investment meets your Investor DNA. I have used this tool multiple times to help me and it can help you.

Alternative assets may have a place in your portfolio depending on individual strengths and preferences. Always ensure that whatever investment is chosen that it matches your Investor DNA. The key is to ensure that whatever is chosen covers basic living expenses in retirement and lets the 401K investments cover the “fun stuff” that makes the years of hard work worthwhile.

Until next time……

Live the Life You Love, Want, and Deserve…. 😊