Financial Basics · Investing Fundamentals

Alternative Investments

Definition

Alternative investments are assets outside traditional stocks, bonds, and cash — including REITs, commodities, private equity, hedge funds, and private credit. Most "alts" promise diversification, higher returns, or lower correlation to public markets.

Why it matters in retirement

Alts are heavily marketed to pre-retirees as a way to "de-risk" or "diversify." Many carry 2–3% annual fees, 20% performance fees, multi-year lockups, and marketing-driven return numbers that don't hold up under scrutiny. Understand what you're buying before you commit capital you may not be able to access for 7–10 years.

Key Numbers — 2026

Typical PE/hedge fund fee
2% + 20%
Avg PE lockup period
7–10 yrs
Accredited investor threshold
$1M NW / $200K income
REIT dividend yield
~4%

Pros

  • Potential diversification
  • Access to private markets
  • Inflation hedge (some)

Cons

  • High fees erode returns
  • Illiquidity — can't exit
  • Opaque pricing and valuation
  • Return data is self-reported and biased

Common mistakes

  • Assuming "non-correlated" means "safe"
  • Ignoring the 2-and-20 fee drag on long-term returns
  • Allocating more than 10–15% of portfolio to illiquid alts in retirement
  • Believing marketing IRR numbers without understanding how they're calculated

Related

Want help applying this to your situation?

Take the free Retire Ready Score to see where you stand.

Take the Free Assessment →