If you’re concerned that investing in traditional stocks and bonds with a common asset allocation won’t provide a comfortable retirement for life, you’re not alone. We had those same concerns over a decade ago, along with millions of other investors over 50, and here’s what we discovered.
Alternative retirement investment strategies can result in higher income than traditional long term stock and bond investing while also building wealth.
After almost 40 years of investing in stocks and bonds, both alone and with financial advisors, and implementing alternative retirement investment strategies over the past 15 years, I’ll share what we learned.
Long term buy and hold asset allocation can work well for many younger and high net worth individuals. It’s less certain, however, for many investors over 50 than it is for those with decades to save and invest, or those with millions to retire.
In fact, the more the stock market has risen in the years leading to retirement, the less unreliable it becomes as a retirement investment solution.
What Are Alternative Investment Strategies?
Anything other than long term buy and hold investing based on asset allocation for your age and risk profile is usually considered an alternative investment strategy.
This is because the traditional buy and hold method is so widely promoted that it is accepted and used without question by investors, much like margarine being accepted as a healthy alternative to butter in the 1960’s.
But the growing popularity and spread of factor based investing, as addressed more ahead, is chipping away at the assumption that traditional asset allocation and long term investing is the best way for everyone to invest.
The reality is that there are many alternative retirement investment strategies that have benefits which long term stock and bond investing simply don’t provide.
The rest of this post will address potential alternative retirement investment strategies for those nearing retirement or in retirement.
As usual, all investment strategies you’ll read about here are what I call “slightly alternative investment strategies.” There’s nothing outrageous here at Retire Certain, like tulips in Holland.
Instead I write about what I call “slightly” alternative retirement investment strategies. They are tweaks to long term traditional investing in stocks and bonds.
You won’t even find crypto-currencies here, probably not for another decade or so, so keep reading if this appeals to you.
If asset allocation is confusing, read my post How to Understand Your Investments.
Value Investing Around Market Cycles
I’m starting with value investing around market cycles because this core investment strategy can be applied to all investments to reduce risk while building wealth, too. It’s super important to realize that this cycle valuation approach should be applied to every other alternative investment in this post (with the exception of starting your own business) as explained more ahead.
The question to ask before investing in anything is “How is this asset valued relative to historical valuations?”
For example, investments become more and more expensive as economic expansions continue. Stocks typically hit their peak once the growth slows just after investors are convinced stocks will never decline.
Then stock (and many other) investments become less expensive after a recession.
Read my related post What Goes Up When Stocks Go Down?
Here is a video I did on this called How to Know If Stocks Will Go Up.
Investing Based on Valuations
By first comparing how an investment is valued relative to history you can
- Adjust the percent you allocate to it
- Avoid it altogether until valuations are cheap again OR
- Buy invest heavily in that particular asset if it’s it is undervalued relative to history
While I’m no economist, no one needs to be one to see that this is logical. And anyone over 50 whose been paying attention has seen these cycles several times, mostly from changes in both stock and real estate valuations over the years.
Read my related post How to Increase Net Worth Before Retirement.
How the Wealthy Invest
Simply adjusting the commonly accepted fixed asset allocation based on age and risk profile as valuations change due to economic cycles is what the “smart money” does. This is what the wealthy do and it is what high net worth financial advisors do for their clients.
This is often referred to as tactical investing since investors (or their wealth managers) invest strategically rather than with a standard fixed asset allocation model regardless of valuations.
Considering market cycles leads to value investing which drives the percent invested in various assets, such as cash, stocks, bonds, and commodities.
Market cycles can also be applied to small business and real estate investing as explained more ahead.
Isn’t This Riskier Than Long Term Passive Investing?
While investing around market cycles often gets tagged as “market timing” or risky, the fact is that:
- Buying assets cheaper lowers risk.
- Buying expensive assets increases risk.
The risk is that investors will miss out on stock market gains. While this can happen from being overly risk averse, all investors have to decide the level of risk they want.
Value investing isn’t a new and risky alternative retirement investment strategy. In fact, it’s the old fashioned way of investing.
Value based investing around economic and related market cycles is the way successful investors invested long before the rise of asset allocation and index investing were sold to the masses.
Don’t get me wrong; it’s not that long term asset allocation index investing doesn’t work. It’s simple and makes sense because it keeps investors in somewhat non correlated assets thereby reducing risk.
But it doesn’t work for everyone, especially investors nearing retirement who have not saved enough money to retire comfortably.
And it is also not how the wealthy, more proactive investors invest, typically.
Using Factors for Alternative Retirement Investment Strategies
The next slightly alternative retirement investment strategy is factor based investing.
Certain factors such as momentum, quality, company size (for stocks), and volatility are used to invest among various types of assets. These factors usually move in relation to… you guessed it….market cycles.
But factor based investing isn’t just about buying undervalued investments like the first method above.
Factor based investing may seek to capture higher returns due to rapidly rising markets (momentum) during strong increasing economies, for example. In this case, these would be expensive stocks that are rapidly rising in prices.
In other words, momentum stocks have high valuations.
Another example of factor based investing would be investing in small company stocks in the earlier stages of economic expansion and lowering exposure to them near the end of economic expansion.
So rather than blindly investing a certain percentages into stocks and bonds based on Vanguard’s (or your financial advisor’s or brokerage firm’s) suggested asset allocation, a strong consideration is given to economic cycles and other factors in choosing types of investments.
Factor based investing is common among more sophisticated financial professionals. Many individual investors, however, are not aware of the term factor based investing.
You can see from the Vanguard chart below the logic behind the different factors used in factor based investing, which are based on economic and related market cycles.
In essence, factor based investing uses data, historical facts and logic to invest in assets that have a higher probability to increase in value.
On the other hand, asset allocation invests set percentages into different kinds of investments (assets) based on models which consider the investor’s age and risk profile, regardless of market valuations.
Wealth Tip – Invest with logic instead of emotions or commonly accepted advice.
You can see from the chart below how assets with various factors, such as value or small size perform better during various phases of market cycles.
Using Factor Based Investing
You may be wondering how you can use factor based investing without having to stay on top of the economy, financial markets and all the different factors.
Factor Based Investing and Wealth Management
If you don’t want to invest your own money, many financial advisors and wealth managers use factor based investing and they have entire research departments dedicated to analyzing the factors.
If you’re already working with a financial advisor, you can discuss how they apply factor based investing to your wealth management, or if they instead use a set asset allocation.
This makes you all the wiser and better leader of your wealth.
Factor Based Investing for DIY Investors
If you invest your own money, you probably already know if you lean toward a firm standard asset allocation model no matter what, being a value investor, a momentum investor or incorporate factors based on cycles.
Be aware that sometimes the logic and simplicity of investing strategies such as factor based investing can become esoteric via overly complex explanations.
It’s very logical that investments that are fast growing will gain steam as the economy races ahead, or that low volatility stocks will have increased demand near during a recession, for example.
But when the various factors are all assembled on the Vanguard chart above they can can seem overly complex for individual investors like you and me.
When in actual fact, factor based investing is very logical and even somewhat intuitive.
Smart Beta Investing Strategies
Smart beta is another popular related slightly alternative investment strategy very similar to factor based investing. While the two are officially a little different, they same terms are commonly used to mean the same thing: investing based on certain factors.
In essence, both smart beta and factor based investing seek to beat returns from standard asset allocation models used for index investing. And what investor doesn’t want to make more money from investments?
Smart beta factors include yield in addition to value, size, volatility, and quality (dividend payers). (1.)
Logic Based Investing
As you may have read here, in the early 1980’s my dad bought all the municipal bonds which he could gather up the money to buy because they were selling at huge discounts of up to 50% and yielding up to 25% tax free.
Was this smart beta investing? Yes. Did my dad know that? No.
What he did know was that municipal bonds were much cheaper than logic would hold, homes and utilities were a top priority for people no matter what, the exact same bonds were selling at face value only a few years before, and tax free yields of 25% were exceptional based on historical data.
He knew this by reading the Wall Street Journal and paying attention to the economy and financial markets in between full time work, fishing, golf and family time.
Don’t feel overwhelmed by the fancy terminology. At it’s core, factor based investing and smart beta investment strategies are based on cycles, valuations and logic.
MLPs for Retirement Income
MLPs are Master Limited Partnerships. They are often in some aspect of oil businesses, such as transportation or drilling.
Like almost all investments, MLPs valuations will vary based on the cycle of both the economy and the underlying natural resource, such as crude oil.
Creating a diversified portfolio of MLPs, they can be an excellent slightly alternative retirement investment strategy given their high yield.
REITs for Retirement Income
REITs are Real Estate Investment Trusts. They allow the public to invest in large commercial real estate deals that would otherwise not be accessible to individual investors.
Like MLPs, REITs are structured different from stocks but can be bought and sold easily just like stocks though your online brokerage platform.
They also typically have a higher yield than stocks.
Like MLPs, investing in REITs has some tax benefits. This benefit may possibly, however, be offset by the extra time it takes your CPA to prepare your return.
And like MLPs, creating a diversified portfolio of REITs can be an excellent slightly alternative retirement investment strategy given their higher than stock yield. And, of course, investors can also often build wealth, too, when they buy REITs at low valuations.
Covered call investment strategies involve selling a call option against a stock you already own. Contrary to popular belief, selling covered calls is not riskier than owning stocks without covered calls.
In fact, selling covered calls is slightly less risky than owning stocks without covered calls since the call income reduces the overall cost of your stock position.
Covered call strategies can be added to other stock strategies, such as factor based investing or dividend investing, for example.
By doing this, you are using the same capital to generate extra income. For this reason, covered calls are one of my favorite alternative retirement investment strategies.
Covered calls can even be sold in retirement accounts.
The important downside of covered call writing is that basic covered calls work best in sideways and strong markets. For this reason, covered call strategies make sense as one among several diversified alternative investment strategies, particularly when income generation is the goal.
Applying the very first alternative retirement investment strategy of investing around market cycles reduces risk and increases returns from covered call writing.
Given that income from covered calls is often double or triple dividend income, covered calls can be an excellent retirement income strategy. This is especially true for investors who have large stock positions inside IRA accounts and need to make withdrawals anyway.
Real Estate Rentals
Real estate rentals are another one of my favorite alternative retirement investment strategies. Real estate rental properties provide income when structured correctly and bought at low valuations.
Plus, real estate rental properties can be bought with leverage, a particular bonus during periods of low interest rates.
And, while I don’t believe that any investment is completely passive due to the management and the brain power all investments require, the income from real estate rentals can be mostly passive income based on my personal experience.
Like all the alternative retirement income strategies here, considering market cycles before purchasing real estate can significantly enhance both income and wealth building opportunities.
Real estate rentals are just another income generating asset that can lead to capital gains when bought during periods of low valuations. This makes them a solid alternative retirement investment strategy.
There are several ways to invest in small business. The one thing that I learned early on about small business investing is to diversify 10 to 1 since small businesses have a very high failure rate.
I have found the exception to this rule is owning our own online small businesses. Since we control them and they require minimal investment capital to start, it is not necessary to diversify 10 to 1.
Online Lending for Startups
Online startup lending has become a popular investment. I have personally not invested in this space. I tend to like investment strategies that have been through at least one economic downturn before investing in them.
Plus, we prefer to invest in our own online small businesses.
But given the diversification and pre-screening that many of the online startup investing platforms provide, I would consider this alternative investment if we were looking to expand our investment portfolio.
You can read my entire post titled Investing in Startups for Individuals.
Angel investing is yet another alternative retirement investment strategy. Local angel investing can make sense for:
- Investors who live in an area with a strong angel network
- Investors who have business related experience
- Investors looking to be more hands on involved in small business but do not want outright ownership
- Investors who have the time and resources to diversify among 9 more small businesses.
Starting a Small Business
Starting a small online business is another favorite alternative retirement investment strategy. While owning a small business is not commonly considered an investment, I contend that it is an investment because your time and money go into it.
Not only this, but when structured properly, your online business can be sold, and it can also generate income while you own it. How could this not be called an investment?
Instead of investing in a public company over which you have zero control unless you’re Warren Buffett, you can build your own online business for less than $25, control it, and reach a global market with it.
Buying an Online Business
Investing in online businesses is becoming more common every day. Only recently buying an online business was considered the wild, wild west. Now, VC firms are buying online businesses and creating funds made up of them.
I haven’t bought an online business yet but it is on my list of investments to make at a time when most assets are overvalued. I think we’ll all be kicking ourselves in a few years for not taking advantage of this alternative investment that can be bought at a very small fraction of public stock valuations.
The earnings multiplies at which small online businesses sell has increased from 2 to 3 over the past few years as they have become better accepted from the overwhelming success of many former blogs as well as e-commerce stores.
Applying the valuation cycle theory, after an economic slowdown, I expect small businesses will sell closer to multiples of 2 again.
Interestingly, this same principle can be applied to common stocks with the popular PE ratio which reflects the multiple of earnings reflected in a company’s stock price.
Again, small online businesses sell for a fraction of the earnings multiple of most common stocks.
Starting or Buying a Local Business
Given the huge amount of capital required to buy or start a brick and mortar business, after investigation, we decided not to do this when we first began alternative investing for retirement.
Due to the risk involved, I won’t cover this as a potential alternative investment since I think that, like me, most investors want less risk as they age.
Online Lending for Real Estate
Online lending has also become a mainstream alternative retirement investment. I have not ventured into online real estate lending. This is mostly because we learned over a decade ago that we do best by touching and feeling our real estate investments near our own back door.
But online real estate lending can make sense for many investors seeking alternative investments beyond traditional stocks and bonds. The geographic and property diversification that can be achieved from online real estate lending is appealing.
Like all investments in this article, valuations and risk are imperative to consider before investing.
Summary for Alternative Retirement Investment Strategies
As you can see, I am a big believer in alternative retirement investment strategies for those who don’t have enough money saved to live comfortably in retirement, or even those that do.
In fact, most wealthy investors use alternative investment strategies.
We are living in a time of incredible opportunity given the availability of reliable data to research alternative investments, the ease of purchase and the wide variety of alternative investments available for investors at all levels of net worth.
I wrote an eBook with our favorite 9 wealth building income generating strategies which are all slightly alternative investments. Click here if you want it.
Disclaimer: Nothing in this post is meant to be taken as personal financial advice.