All of us are concerned (or should be) about accumulating sufficient assets to ensure a stress-free retirement. When we stop working for money, the money we have accumulated has to start working for us. The challenge is to accumulate enough money during our working years so that, when we retire, these funds can start working to provide an income that will maintain our desired standard of living, and we can rest assured that the income will last as long in retirement as we do.
While previous generations could count on receiving a lifetime pension provided by their employer at retirement, this is no longer the case today. The truth is that no one will do this for us, and we are basically on our own when it comes to preparing for retirement.
Unfortunately, as effective as a 401(k) at work can be (and if you are not putting as much as you can into a 401(k), you should be), funds accumulated in a 401(k) are seldom sufficient to guarantee that you will not run out of money during retirement or that you will have the income necessary for a comfortable retirement. With that in mind, it behooves us to implement a personal investment plan that will supplement the 401(k).
Fortunately, there is a supermarket full of traditional investments, such as stocks, bonds and mutual funds, that can be used to supplement the 401(k). Of course, any investment comes with risk, and that can be stressful, but that stress is mitigated by the fact that traditional investments are “liquid.” If things start to go south with traditional investments, they can always be sold and the funds held for a better day. The downside with traditional investments, however, is that they often do not maximize the potential return on your invested funds.==============
There are other investment options that could potentially offer three to five (or more) times the return you might expect from traditional investments. These other investment options are lumped under the term “alternative investments.” These alternative investments include things like private equity funds, investment partnerships, venture capital groups, hedge funds, real estate investment trusts, commodities, derivatives and even arbitrage funds.
The appeal of alternative investments is the potential for significantly higher returns on your investment, but the downside is exponentially higher risk and illiquidity. You are not able to recover your investment at the time of your choosing.
Another element of most alternative investments is that they are long-term in nature. It is not unusual for your investment to be “locked up” for three to five years or even longer. If you need to recover your capital, or if things go bad, there are very few, if any, options. This is the price you pay to play in order to potentially receive significantly higher returns than those offered by traditional investments.
This all adds up to a lot more stress when investing your hard-earned money in alternative investments. Fortunately, there are three simple rules that, when followed, will significantly reduce the level of stress that comes with alternative investments.==============
Rule 1: Do you know and respect the person who is trying to convince you to invest in an alternative investment?
Have you been friends or done business with this person before? Are they selling you a pre-packed deal or are they directly involved with the management of the deal? Do they have their own money at risk? If the answers are “no,” that should be your response to the investment.
Rule 2: Be sure that you fully understand the structure of the deal, the risks at hand and how the potential returns can be achieved.
Remember, there are never any secret or magic ways to be successful, especially when it comes to alternative investments. All too often, those who claim to have a secret method of investing end up on the front page of the paper in the midst of a perp walk. If you don’t understand the deal, it’s not because you are stupid; you are only stupid if you invest in a deal that you don’t understand.
Rule 3: Never put so much money in a single alternative investment so that if you lose it all, it will change your lifestyle.
In other words, once you make an investment in an alternative investment, mentally assume it will be lost. That may seem counterintuitive, but it is absolutely the best way to approach risking your money in an alternative investment. The brutal truth is that, if you don’t have sufficient excess capital to adopt this attitude toward an alternative investment, you don’t have enough capital to even consider such an investment.
Religiously following these rules will not assure success or eliminate risk, but it will significantly reduce the stress that comes with alternative investments. And following the rules will enhance the chances of success.
Preparing for retirement is a little bit like baking a cake. Your 401(k) (and other tax-favored plans) and a systematic traditional investment plan will form the layers of your cake. The intelligent use of alternative investments can provide the frosting for your cake, and that will allow an even sweeter retirement.