Top Alternative Assets for Your IRA

May 20, 2021 11:49 AM ET
Top Alternative Assets for Your IRA

An Individual Retirement Account (IRA) is a portfolio that people make as a way of saving and investing for their later years. There are three popular types of IRAs:  traditional IRAs, Roth IRAs, and Rollover IRAs. These products are popular in the United States, where about a third of households hold them. Stocks are the most popular assets in IRA accounts. In this article, we will look at other popular alternative assets that you can invest in your IRA. 

Cryptocurrencies

Cryptocurrencies, also known as alternative assets, are a relatively new asset class that is being popular among many people and companies. The value of digital currencies in existence has grown from zero in 2009 to more than $2.3 trillion in the second quarter of 2021. Further, the number of available coins has grown to almost 10,000.

Cryptocurrencies have been the best-performing assets in the past decade. Besides, the price of Bitcoin has surged from less than $1 in 2009 to over $60,000. Similarly, Ether has rallied to almost $5,000 while other currencies like Binance Coin and Litecoin have more than doubled in the past few years.

Most people avoid digital currencies because of their volatility and the fact that they are generally unregulated. Indeed, it is not uncommon for the price of a major digital currency like Bitcoin and Ether to decline 20% in a single session. 

Still, allocating some of your IRA funds into cryptocurrencies has been a relatively rewarding experience. For example, people who invested in BTC five years ago have seen returns of more than 11,000%. In the same period, those who invested in the S&P 500 index have just doubled their funds. 

S&P 500 vs Bitcoin 5-year performance

S&P 500 vs Bitcoin 5-year performance

There are other reasons why adding digital currencies to a traditional or Roth IRA makes sense. First, as mentioned above, currencies like Bitcoin and Ether have outperformed traditional assets like stocks and commodities in the past decade. 

Second, many institutions and experienced investors are adding the currencies into their portfolios. Third, many analysts believe that the future will be decentralized. For example, in the past two years, the total value locked (TVL) of the Decentralized Finance (DeFi) industry has moved from zero to almost $100 billion. 

Finally, having some exposure is a low-risk, high-reward scenario especially when you allocate just a small portion of your IRA into the cryptocurrencies. 

Commodities

Commodities are popular alternative assets in many peoples’ Individual Retirement Accounts (IRA). There are several types of commodities that you can add to your portfolio but the most popular are precious metals. Examples of these metals are gold, silver, platinum, and palladium. 

Their prices are moved by several factors including demand, supply, and monetary issues like interest rates. In most cases, their prices rise in a low-interest-rate environment and lag when conditions are tight. 

In the past decades, the prices of some precious metals have been on an upward trend. 

For example, the price of gold rose from $720 in 2009 to more than $2,000 in 2020. Similarly, palladium rose from less than $160 in 2009 to over $2,600 in 2021. Indeed, palladium has outperformed the S&P 500 since 2007. The performance of gold has been on par with that of the S&P 500, as shown in the chart below.

S&P 500 vs gold and palladium

S&P 500 vs gold and palladium

There are several ways of investing in these assets for your IRA. First, you can buy the physical assets and store them yourself. There are many companies that sell genuine precious metals online. Second, you can use companies like Regal Assets that create precious metals and cryptocurrency portfolios. 

Third, you can buy exchange-traded funds (ETFs) tied to commodities. Some of the most popular ones are the iShares Silver Trust (SLV), iShares Gold Trust, and Aberdeen Standard Physical Platinum Shares (PPLT), among others. These ETFs are bought like stocks and their prices track those of physical commodities.

Finally, you can buy the digital version of those commodities using a broker. In the United States, brokers like Robinhood, Schwab, and Fidelity offer the ability to buy commodity futures.

Some of the benefits of adding commodities to your IRA are the fact that they are uncorrelated to the broad market and they can offer significant returns over time. 

Real Estate

Real estate is a leading asset that you can add to your IRA. There are several types of real estate assets like online platforms, physical real estate, residential, and commercial property. When done well, real estate offers an excellent way to make money in the long term. 

For example, if you invest in rental property, you will generate returns on a monthly, quarterly, or annual basis. At the same time, the value of the property should keep rising. You can even sell it at a substantial profit during your retirement.

Another way of investing in real estate is to use digital platforms like RealtyMogul and Fundrise. RealtyMogul is a company that allows investors to invest in REITs, individual properties, and 1031 exchanges. All this is done by just completing a form and depositing funds online. It takes less than an hour to invest through the firm. The Fundrise works in a similar way. You create an account, select the package you want to invest in, fund your account, and you are set.

You can also invest in listed Real Estate Investment Trusts (REITs). These are companies that are mandated by law to return dividends to investors every year. For an IRA, REITs offer a safe way to invest and see your returns grow through dividends. You can invest in REITs directly or through ETFs like the Vanguard Real Estate Index Fund (VNQ) and Schwab US REIT ETF, among others.

Final thoughts

The best assets to add to your IRA are stocks. Furthermore, they have a long track record of delivering returns to their investors. However, having some alternative assets can help deliver quality and uncorrelated returns. In this article, we have looked at three such assets. Other alternatives are private equity, hedge funds, and peer-to-peer lenders.


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