Alternative Investments: Should Retirees Look Beyond Stocks and Bonds?
A clear-eyed guide to private equity, private credit, real assets, and other alternatives — and whether they belong in your retirement portfolio
For decades, the conventional retirement portfolio consisted primarily of publicly traded stocks and bonds, the classic 60/40 allocation. This approach has served many investors well. But in an era of lower expected returns from traditional fixed income and growing awareness of alternative asset classes, more retirees are asking: is there a role for alternatives in a retirement portfolio?
For those with $1M+ in investable assets, the answer may be yes, but with important caveats around liquidity, complexity, fees, and suitability. This article provides a balanced overview of the major alternative asset categories and the considerations relevant to retirees.
What Are Alternative Investments?
Alternative investments are asset classes that fall outside the traditional categories of public equities, government bonds, and cash. They include:
Private equity: Direct investment in private companies, or through private equity funds. Returns are driven by business growth and operational improvement rather than public market sentiment.
Private credit: Loans made to private companies, often at higher interest rates than public bonds to compensate for illiquidity and credit risk. Includes senior secured loans, mezzanine debt, and direct lending strategies.
Infrastructure: Investment in assets like toll roads, airports, utilities, pipelines, and renewable energy projects. Typically characterized by stable, long-term cash flows and some inflation linkage.
Real estate (private): Direct ownership of investment properties, or investment in private real estate funds. This is distinct from publicly-traded REITs, which behave more like equities.
Hedge funds: A broad category of strategies that may use leverage, short-selling, derivatives, and other techniques. Quality and approach vary enormously across the category.
Commodities and real assets: Gold, oil, agricultural land, and other physical assets that may provide inflation protection and diversification.
The Potential Benefits for Retirees
When appropriate, alternatives can serve several functions in a retirement portfolio:
Diversification: Alternative assets often have lower correlation with public equity and bond markets. Meaning they may hold their value better during a public market downturn. This is particularly valuable for retirees managing sequence-of-returns risk.
Income generation: Private credit and infrastructure investments can generate attractive income streams, often at higher yields than public bonds. Providing reliable cash flow in retirement.
Inflation protection: Infrastructure assets with inflation-linked revenues, real estate, and commodities can provide a hedge against unexpected inflation over a long retirement.
Return potential: Private equity has historically generated returns that exceed public equity over long time horizons (though with significant variability, survivorship bias in the data, and private equity’s use of debt).
The Significant Caveats
For retirees specifically, alternatives come with important limitations that must be taken seriously:
Illiquidity: Most alternative investments lock up capital for 3–10 years or more. For a retiree who may need to access capital for healthcare costs, long-term care, or lifestyle needs, tying up a large portion of the portfolio in illiquid investments is dangerous. The liquidity budget of the overall portfolio must be carefully managed.
Complexity and due diligence requirements: Evaluating a private equity fund or a private credit strategy requires expertise that most investors do not have. The range of quality among managers is enormous, and poor manager selection can result in significant capital loss.
Fee structures: Alternative investments typically charge higher fees than traditional investments. Often a management fee of 1–2% plus a performance fee of 15–20% of returns. These fees must be overcome before generating net returns to investors.
Accredited investor requirements: Many alternative investments in Canada are only available to 'accredited investors'. Individuals with net financial assets exceeding $1M or income exceeding certain thresholds. Access has improved, but the investable universe for smaller portfolios remains limited.
Valuation opacity: Private asset valuations are typically quarterly estimates rather than daily market prices. This can obscure real-time risk and make it harder to understand the true current value of the portfolio.
REITs: A Liquid Alternative to Direct Real Estate
For retirees who want real estate exposure without the illiquidity and complexity of private real estate funds, publicly-traded Real Estate Investment Trusts (REITs) provide an accessible alternative. Canadian REITs offer:
Regular distributions (monthly or quarterly in most cases) funded by rental income.
Daily liquidity, REITs can be bought and sold like any public stock.
Diversification across property types (industrial, residential, retail, office) and geographies.
Returns that have historically tracked well with inflation over long periods.
REITs are best held inside registered accounts (RRSP/RRIF or TFSA) because their distributions are typically fully taxable, making the registered account's tax shelter most valuable. See our article Capital Gains vs. Dividends vs. Interest: Which Income Is Best for Retirees?
Is There a Role for Alternatives in Your Portfolio?
We evaluate the suitability of alternative investments for each client based on their specific income needs, liquidity requirements, time horizon, and risk tolerance — recommending alternatives only when they genuinely improve the portfolio's risk-return profile.
Contact us today for a complimentary consultation
This publication is for informational purposes only and has been prepared from public sources which are meant to be reliable. None of the information in this should be construed as investment advice. Speak to your Investment Advisor to learn if this product is right for you. Designed Securities Ltd. (DSL) is regulated by the Canadian Investment Regulatory Organization (CIRO), and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Christopher Burke is registered to advise in securities to clients residing in Ontario. The views expressed are those of the author and not necessarily those of DSL. This report does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized or to any reliable person to whom it is unlawful to make such offer or solicitation. Content is accurate as of the date of publication, and subject to change without notice.
