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When Do Alternatives Belong in Your Portfolio? · How to Retire on Time

• 0:00
  Mike: Hi. Mike Decker, author of the book How to Retire on Time. Here's a question I was recently asked on my Retire on Time q and a. Check it out.
• 0:12
  David: Okay. So the first question that has come in, how do you use alternatives in a retirement plan? So a, define what alternatives are.
• 0:22
  Mike: Alternative is basically not stock or not bond.
• 0:25
  David: Okay. Alright. Because, yeah, we always think about the stock bond portfolio. Right? Those are the those those are the two.
• 0:32
  So outside of those two, what else can you invest?
• 0:34
  Mike: Yeah. So alternative to that.
• 0:36
  David: Yeah. Alternative to those two staples.
• 0:38
  Mike: In my mind, I think one of the more common ones is... And I kind of just mentioned this earlier with JPMorgan's research. I think it was JPMorgan that did it, but they just found 30% of alts, which was mostly real estate, helped stabilize a portfolio and so on. So I like alts for the growth portfolio, not for the income component. And let me explain that.
• 1:00
  When you have an asset that's paying something like a dividend or real estate, it's a nice to have, but consider your growth. So what's the difference if your asset, let's say, increases in price by 7% versus an asset that pays 7% out every year? It's the same way to grow your money. The problem is sometimes the asset doesn't grow by 7%. Sometimes it's more or less or loses money.
• 1:24
  Sometimes the payout is there. Sometimes it's not there. So I like to have the growth portfolio packaged of different ways to increase the balance size of the portfolio. And then on our discretion, understand where we're gonna take and how much we're going to take. That way you're not dependent on a dividend coming out for your income source.
• 1:47
  You have more control over it.
• 1:50
  David: Okay.
• 1:50
  Mike: K. So with alternative investments, you could do like REITs, real estate investment trust is fine. I personally right now I'm preferring preferred stock placement because it's more of it's an easier way to get out of it. Okay. So like after five years, you could just redeem it.
• 2:06
  There's no penalties, or you can keep it there. And as long as it keeps paying out, that's like... It's kind of a good deal. So like It's
• 2:11
  David: more liquid is what you're saying?
• 2:13
  Mike: It's more liquid, and it's in the real estate market, not the stock market per se.
• 2:17
  David: Okay.
• 2:17
  Mike: And I would caution people on just publicly traded stocks are very different than private placement or preferred stocks for very specific deals with very specific timelines. The problem with this, though, is you can't get these things on your own. You have to go through a licensed financial adviser just to get access to it. Mhmm. Once you have it, you don't need that adviser anymore.
• 2:39
  So if you wanna get it and then not pay 1%, then just buy it and then leave. Quick hack. People don't like me sharing that, but I think it's an important part of it, of this. And that's just understanding get access, and then once you have access, you know, you just maintain the product. I wanna pause real quick and just say, if you're getting close to retirement, I wanna invite you to download my book, how to retire on time.
• 3:05
  It's free. Just go to retireontime.com, and you can download my book, get the audiobook, the workbook, and so much more, including six plus calculators to help you prepare to retire on time. Check it out. Retireontime.com. Alright.
• 3:20
  Let... Now let's get back to the show. Yeah. I mean, just like medications, right, you have to go through a doctor to get a certain medication, but it's gonna be up to you to actually respect the medication, to follow the instructions.
• 3:29
  David: Right.
• 3:30
  Mike: If you have an allergic reaction to the medication, go back to the doctor or a hospital. But it's just more advanced investments that just need a more careful consideration before they're a part of your portfolio. So for me, I like alternatives when they make sense, when the person is okay with some illiquidity as a part of the long term growth functionality, not the short term income needs. Because there's still a sequence of returns risk. There is risk of it not paying out, and as a general rule, you need to be able to know where your money comes from, whether the markets are up or down.
• 4:06
  And that's not just the stock market, That includes the real estate market. That includes the bond market, all of the other markets.
• 4:12
  David: Okay.
• 4:12
  Mike: What do you think? Did we
• 4:13
  David: answer it? Yeah. I think so. Yeah. How do you use alternatives?
• 4:17
  Are there any other alternatives that deserve an honorable mention here?
• 4:22
  Mike: I mean, the go to's, it's real estate, so preferred REITs. If you have real estate, and you wanna sell it and get out of kind of the landlord duties, you could do a ten thirty one exchange and do a Delaware statutory trust. That would be an alternative. Mhmm. So, you're just moving fractional ownership, or your ownership of your real estate into fractional ownership of institutional real estate, like a warehouse, a massive apartment complex.
• 4:47
  I mean, you ever wonder like how these big things are created? Yeah. It's partnerships. Right. It's Delaware Statutory Trust.
• 4:55
  It's like there's... They're created by people pooling their money to get into a nice investment.
• 5:02
  David: Right.
• 5:03
  Mike: It's not just wealthy people just owning everything. There's there's more to it than that. And then you've got private equity and private credit. Private credit is also known as shadow banking, and right now I think it's higher risk than the reward that makes sense.
• 5:19
  David: Mhmm.
• 5:19
  Mike: So I am not personally wanting to dive too deep into that, but if you really wanted it, we could look into it. Private equity. Problem with private equity is you don't know when you're gonna get your money back. So if you need the money for retirement, like it's a good for legacy, it's good if you don't need the money. But until they IPO, you've...
• 5:39
  You're kind of stuck unless you can sell it to someone else.
• 5:42
  David: Okay. Yeah.
• 5:43
  Mike: So, just be careful with these things. Just because they look fancy, because you think the wealthy do it, that's not true. Yes. Not all the wealthy do that sort of thing. You've got gold, silver, crypto, I mean, you name it.
• 5:58
  Art. Oh, right. If you know a lot about art, you could use that as an alternative. But if you dive into these categories, you have to understand how to get in and how to get out. So, have you ever heard the old adage, what's the second happiest day of a boat owner's life?
• 6:14
  It's the day they buy the boat. The happiest day is when they sell the boat. Yeah. A lot of people have bought a lot of gold lately. Gold's made a lot of money.
• 6:23
  They don't realize how much they're gonna pay in commissions by selling the
• 6:27
  David: gold. Oh, right.
• 6:29
  Mike: And there are steep fees in some places when you sell physical gold. And they'll say, well, I'll just never sell it. Well, then what's the point?
• 6:38
  David: Right. Yeah. These are
• 6:41
  Mike: the questions that challenge people's identities, and I recognize it's hard. You bought it with a certain mission, and then you realize that mission may not go according to plan, and that hurts. Hopefully, the honesty is is appreciated. That's all the time we've got for today's show. If you enjoyed the show, thanks for tuning the podcast.
• 6:58
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