Maximizing Your Roth Ira: Alternative Investment Options

A Roth IRA is a type of individual retirement account that allows you to contribute after-tax money to save for retirement. The main draw of a Roth IRA is that the money grows tax-free and can be withdrawn tax-free after age 59 1/2, as long as the account has been open for at least five years.

There are several options for what to invest in when your Roth IRA is fully funded. You can invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more.

- Vanguard Wellesley Income Fund Investor Shares (VWINX)

- Vanguard 500 Index Fund Admiral Shares (VFIAX)

- Fidelity Contrafund (FCNTX)

- Cohen & Steers Quality Income Realty Fund (RQI)

- Grayscale Bitcoin Mini Trust (BTC)

US stock index funds

When considering US stock index funds, it's important to understand their advantages and disadvantages. One of the main benefits is lower fees compared to actively managed funds. This is because index funds have lower expense ratios, typically ranging from 0.04% to 0.70%. Additionally, index funds offer a simple and cost-effective way to gain exposure to a diversified portfolio, making them attractive to investors seeking a long-term, buy-and-hold investment strategy.

However, one disadvantage of US stock index funds is their lack of flexibility. Since they are designed to mirror a specific market index, they may not be able to pivot when the market shifts. Another drawback is the potential for underperformance compared to actively managed funds, as index funds may have higher tracking errors and may include overvalued or weak companies in their portfolio.

When choosing a US stock index fund, it's crucial to consider factors such as the fund's performance history, management fees, and the index it tracks. Additionally, diversifying your portfolio by investing in multiple index funds can help minimize risks. Remember to review the fund's fees and performance closely before investing and ensure that it aligns with your financial goals and risk tolerance.

US bond index funds

Bonds are a way for governments or companies to borrow money from investors in exchange for income. They are typically considered a safe investment because they are less volatile than stocks and can help to balance out your stock holdings. Bonds also provide regular income, known as coupons, which can help supplement your earnings.

When investing in bonds, it is important to be aware of the different types of risks involved, such as interest rate risk, credit risk, liquidity risk, and inflation risk. US government bonds, or "Treasuries", are generally considered the safest investment due to the very low probability of the government defaulting.

• Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
• Schwab U.S. Aggregate Bond Index Fund (SWAGX)
• Fidelity Sustainability Bond Index Fund (FNDSX)
• Fidelity U.S. Bond Index Fund (FXNAX)
• Fidelity Flex U.S. Bond Index Fund (FIBUX)

Global stock index funds

• Broad Diversification: Global stock index funds offer exposure to a diverse range of companies and industries across different countries and regions. This diversification can help reduce the overall risk of your portfolio, as it is not dependent on the performance of any single market.
• Low Costs: Similar to other index funds, global stock index funds are passively managed, which means they have lower expense ratios compared to actively managed funds. The focus on keeping costs low is beneficial for long-term investors.
• Performance: The performance of global stock index funds will depend on the specific index being tracked and the economic performance of the countries included in the index. Over the long term, these funds can provide solid returns, but there may be periods of higher volatility and underperformance.
• Currency Risk: Investing in global stock index funds also introduces currency risk, as the value of your investments will be affected by fluctuations in exchange rates. This is an additional factor to consider when evaluating the potential returns of these funds.
• Specific Fund Options: When choosing a global stock index fund, it's important to research the specific fund's performance, fees, and underlying index. Some popular options include the Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) and the Northern Global Sustainability Index Fund (NSRIX), which focuses on environmental, social, and governance (ESG) criteria.

Crypto and other alternative assets

Cryptocurrencies and other alternative assets are becoming increasingly popular investment options for investors looking to diversify their portfolios. These types of investments are considered "alternative" because they do not fall into traditional categories like stocks, bonds, or cash. While they may carry more risk than traditional investments, they also offer the potential for higher returns.

Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that use cryptographic technics and decentralised networks to facilitate peer-to-peer transactions. Bitcoin (BTC) is the most well-known and dominant cryptocurrency in terms of market capitalisation, user base, and popularity. However, there are thousands of other cryptocurrencies or "altcoins" that have gained traction, such as Ethereum (ETH), Tether (USDT), XRP, Binance Coin (BNB), Cardano (ADA), Solana (SOL), Dogecoin (DOGE), and Shiba Inu (SHIB). These altcoins offer various features and improvements compared to Bitcoin, such as faster transaction speeds, lower fees, and different consensus algorithms.

Cryptocurrencies have become a popular alternative investment choice due to several reasons:

• Increasing regulation: Cryptocurrencies are becoming more regulated, reducing the "wild west" perception and providing more security for investors.
• Improved liquidity: It is now easier to exchange cryptocurrencies for cash or spend them directly, thanks to financial services like Wirex.
• Diversification: Cryptocurrencies react differently to economic factors than traditional investments, making them a good way to diversify an investment portfolio.
• Growing market: The cryptocurrency market is maturing and offering more trading options, hedge opportunities, and flexibility.
• Institutional adoption: Reputable companies and organisations, such as Google, Microsoft, Apple, JP Morgan, and Mastercard, are embracing blockchain technology, which underpins cryptocurrencies.

However, it is important to carefully consider the risks associated with cryptocurrency investments, as their values can be highly volatile.

Other Alternative Assets

In addition to cryptocurrencies, there are other types of alternative assets that investors can consider:

• Real estate: This includes investing in physical properties or real estate investment trusts (REITs), which provide regular income payments.
• Collectibles: Rare items such as art, antiques, or collector's items can be alternative investments, but they tend to be illiquid and may take time to sell.
• Venture capital: Investing in early-stage startups or innovative technologies can offer high returns but also carries high risk.
• Precious metals: Gold, silver, and other precious metals are often seen as alternative investments due to their limited supply and potential to hedge against inflation.

When considering alternative investments, it is crucial to assess your risk tolerance, conduct thorough research, and only invest funds that you can afford to lose. Alternative investments can provide diversification benefits and higher returns but may also carry more risk and volatility than traditional investments.

Real estate

REITs are companies that own and operate income-producing real estate, such as office buildings, retail spaces, apartments, and warehouses. They are traded on stock exchanges, and you can buy and sell shares of REITs through a brokerage account. REITs are required to pay out most of their taxable income as dividends, making them attractive for income-seeking investors. They are also relatively liquid investments, allowing you to easily buy and sell shares. However, it is important to note that REITs can be complex and varied, and some may be riskier than others.

Crowdfunding Real Estate Platforms

Online crowdfunding platforms allow investors to pool their money to fund specific real estate development projects. These platforms offer the opportunity to invest in a diverse range of real estate projects, but they often require a long-term commitment, with investment horizons of five years or more. When considering crowdfunding platforms, be mindful of fees and eligibility requirements, as some platforms cater exclusively to accredited investors.

Rental Properties

Investing in rental properties can provide steady cash flow and the potential for capital appreciation. There are two main types of rental properties: long-term rentals, which are typically leased for at least a year, and short-term rentals, such as Airbnb properties. Being a landlord comes with responsibilities, including finding and vetting tenants, handling maintenance and repairs, and dealing with any issues that arise. Alternatively, you can hire a property management company, but this will reduce your returns.

Flipping Properties

Flipping houses involves buying underpriced properties, renovating them, and then selling them for a profit. This strategy can be lucrative but also carries risks and requires significant time and capital. Renovations and construction can be costly, and accurately estimating expenses can be challenging. Partnering with an experienced contractor or real estate investor can help mitigate these risks.

Primary Residence

Investing in your own home is a common way to gain exposure to the real estate market. Over time, your home may appreciate in value, building your wealth. However, it's important to consider the costs associated with homeownership, such as maintenance, repairs, insurance, property taxes, and mortgage interest. While government support and first-time homebuyer programs can make purchasing a home more affordable, the average annual returns on primary residences may be lower than other real estate investments.

Frequently asked questions