Introduction
While liquidity is often prioritized in investment portfolios, a more nuanced approach may yield significant benefits.
David Swensen, former CIO of Yale's endowment, who often allocated between 70%–80% of its portfolio to alternatives, advocated for the "intelligent acceptance of illiquidity" as a sensible, conservative investment strategy.
This perspective suggests that strategic allocation to less liquid assets could potentially enhance overall portfolio performance.
Naturally Less Liquid
Alternative investments are inherently less liquid due to factors such as complicated transaction processes limited to specific time frames, smaller investor pools, and regulatory restrictions.
This illiquidity can be a deliberate feature rather than a drawback, offering several potential advantages:
Still, limited liquidity comes with significant risk, no guarantee of a positive outcome, and may pose challenges during financial stress or when unexpected opportunities arise. Thorough due diligence of each asset, and one's own financial situation, liquidity needs, and risk tolerance is essential when considering these strategies.
In an IRA
To maximize the advantages of less liquid investments, savvy investors can combine the tax efficiency of self-directed IRAs (SDIRAs) with the extended investment horizons of alternatives.
This strategic combination offers powerful benefits:
- Enhanced tax efficiency: SDIRAs allow the typically higher returns of less liquid alternatives to compound tax-free or tax-deferred, amplifying long-term growth potential.
- Duration matching: The long-term nature of retirement accounts naturally complements the extended holding periods required by less liquid assets, reducing the impact of illiquidity.
By leveraging the benefits of SDIRAs for less liquid investments like alternative assets, investors can potentially achieve enhanced portfolio performance.
Note that state tax laws can change, and investors should consult with a tax advisor for the most up to date information on the benefits of SDIRAs.
Balancing a portfolio
We recognize both the potential and the challenges of less liquid alternative investments. Through Marketplace, our goal is to make accessing and capturing the upside of these investments simpler while maintaining the tax advantages of an IRA structure.
To explore how less liquid investments might fit into your retirement strategy, visit Marketplace or speak with our Investor Relations team here.
