Beyond Stocks and Bonds: Exploring Alternative Investments

Increasingly, high-net-worth investors are exploring options beyond traditional allocations to enhance their retirement income strategies. As bonds and dividend payouts have varied widely in recent years, many have turned to alternative income and return sources outside public markets.

Institutional investment trends mirror this shift. Alternative assets, including private equity, private credit, and real estate, now comprise a significant portion of high-allocation, sophisticated investor and institutional portfolios.

Alternative investments can boost income, improve diversification, and enhance return profiles. However, understanding how these assets work is crucial before modifying a retirement income plan, especially considering their potential advantages, liquidity challenges, and risks.

Real Estate: Income and Stability

Real estate can generate ongoing income, but only certain types are designed for that purpose. Real estate income typically comes from properties or strategies that produce steady cash flow, such as rental housing, commercial buildings, or income-focused real estate funds. Properties purchased mainly for appreciation, land development, or short-term resale yield little or no current income.

Private real estate, including direct real property or private real estate funds, differs from publicly traded real estate securities such as real estate investment trusts (REITs). Valuations are based on rents, occupancy, and lease terms, and not daily market prices. Over the past 20 years, private real estate has generated stronger average income returns (about 5.22%) compared to stocks or bonds.

Because long-term leases and steady tenant payments support it, private real estate income may be referred to as “durable”. While property values can fluctuate, rental income can still be stable with continued occupancy, even during market downturns. Rents have historically increased with inflation, helping to preserve purchasing power in retirement.

These benefits come with trade-offs, so real estate fits best as part of a broader income strategy that considers liquidity needs and tax implications.

Considerations

• Illiquidity: Direct property and private real estate funds are usually illiquid, meaning they can’t be sold quickly.
• Management demands: Direct holdings need active oversight or professional property management.
• Costs: Fees and transaction expenses can reduce returns if not carefully managed.

Private Equity: Growth First, Income Later

Private equity involves ownership in private companies or funding certain stages of business growth before they go public. Investors commit capital for several years while managers improve operations and eventually sell the business.

These investments focus on long-term growth rather than current income. Return potential is their main appeal. Private equity has historically outperformed some public market indices in certain periods, although results vary widely and involve higher risk and illiquidity.

Like other alternative investments, private equity plays a specific role in a diversified portfolio. It acts as a growth driver, supporting future income needs rather than immediate retirement spending.

Considerations

• Liquidity constraints: Investments are often locked up for years, with limited options for redemption.
• High minimums: These strategies often require substantial initial capital and are typically available to accredited or qualified investors.
• Complex fee structures: Management and performance fees can eat into net returns if not aligned with results.

Private Credit: Income with Custom Terms

Over the past decade, private credit has surpassed some traditional debt instruments, with average returns significantly higher than those of investment-grade bonds. Private credit, where investors lend directly to companies, has grown quickly as banks retreat from some lending markets.

Many private credit loans have floating interest rates that adjust according to rate changes. This can make private credit appealing during rising-rate environments. Yields often exceed those of public investment-grade bonds, reflecting less liquidity and higher borrower risk.

Investors access private credit through professionally managed funds that diversify lending across multiple borrowers and sectors. Distributions are generally steadier than private equity but less predictable than bond interest.

In a retirement income plan, private credit can act as a middle layer, providing income potential without daily market pricing, but requiring longer holding periods.

Considerations

• Limited liquidity: Like other private market assets, these are not easily sold on short notice.
• Credit risk: Borrowers may be smaller or less regulated, increasing default risk.
• Transparency: These investments often offer less transparency than publicly traded bonds.

For investors seeking reliable income, private credit can be a valuable component when approached with due diligence and careful manager selection, thereby mitigating risks.

Liquidity, Risk, and Integration

Alternative investments have liquidity restraints. With lock-up periods, limited redemption windows, and quarterly liquidity gates, these assets are best paired with liquid reserves for near-term spending. High-net-worth investors often employ a bucketed approach, where cash and liquid bonds cover short-term needs, and private assets target long-term income and growth.

Risk management may include diversification across managers and strategies, disciplined position sizing, and stress testing cash flow projections. Many sophisticated investors combine public and private exposures to smooth income and manage sequence-of-returns risk in retirement. When integrated properly, private assets can complement public markets rather than complicate them.

A coordinated approach is essential for incorporating private real estate, private equity, and private credit into income, tax, and legacy planning. These assets work best when combined thoughtfully with broader financial goals and liquidity needs. An SHP Financial advisor can evaluate these strategies within your overall financial plan. Contact SHP Financial for a complimentary review to help strengthen your long-term retirement strategy.