Diversifying your retirement portfolio is a good way to mitigate risk and improve your returns on your investments. While most people tend to have some sort of retirement plan made up of a mix of conventional funds, it can be helpful to diversify your portfolio by adding in alternative assets.

There are numerous kinds of alternative assets available today for people to invest in, including real estate, exchange-traded funds, and cryptocurrency. Generally, those who are more proactive with their investments and seek out various investment strategies will have the most success diversifying their portfolio and increasing their returns. 

1. Exchange-Traded Funds (ETFs)

An exchange-traded fund (ETF) is a pooled investment fund or a basket of investments, such as stocks and bonds, that are professionally managed. It’s somewhat similar to a mutual fund, in that an ETF allows you to invest in many assets or securities all at once. ETFs share and trades can be bought or sold on a stock exchange throughout the day at fluctuating prices. 

ETFs are considered marketable securities because their share price allows them to be more easily bought and sold on public exchanges throughout the day. They also tend to have lower fees than other types of funds.

These funds have become popular due to their simplicity and affordability. They’re transparent and have tax benefits, but they also have some disadvantages. 

As ETFs are exchange-traded, they are potentially subject to commission fees. You can run into liquidity issues, as prices are at the whim of market trends. Investors can also run the risk of an ETF closing. Because they aren’t traded as frequently, the funds might not bring in enough to cover administrative costs. When this happens, the ETF may close, forcing investors to sell sooner than expected and potentially at a loss. 

2. Cryptocurrency

Though cryptocurrency is considered highly volatile due to its newness and constantly changing prices, it’s gaining in popularity as it’s an excellent way to diversify your retirement savings. If you put in the effort to understand and develop a solid investment strategy, cryptocurrency offers unique diversification benefits far different from traditional investments.

Cryptocurrency is a virtual currency that can be used for digital transactions and investments. Unlike other kinds of money, cryptocurrency is more secure because it exists on decentralized networks that use blockchain technology. 

Cryptocurrency investments are not only ideal simply for the diversification they offer, but crypto markets also tend to provide investors with large gains in short periods. Those who put the effort into crypto trading can have great success maximizing their returns relative to the risks they are taking. 

The nascency of cryptocurrency is also what makes it a potential risk. Those who are not as digitally savvy may need additional help understanding cryptocurrency investments. There is also some uncertainty in regards to how cryptocurrency will function in the long term. Still, it does provide investors with an opportunity to earn a lot of money in a short amount of time, which can be beneficial when trying to grow your income for retirement. 

3. Real Estate 

Real estate investments are another great way to diversify a portfolio because they can provide significant returns. You can even use your cryptocurrency to buy real estate. Though real estate investing is considered an alternative asset, it’s nothing new and can be fairly easy to get into. You can invest locally by buying houses, apartments, or commercial spaces and renting them out short-term or long-term. You can also buy into publicly or non-publically traded real estate investment trusts (REITs) worldwide. 

Real estate investments are highly recommended for diversifying a retirement portfolio, as once a property is flipped, it can yield high returns. However, real estate can require a large upfront investment to get the property ready to be rented or sold for more money, and if you plan to rent out a space long-term, there is management and maintenance of the property to consider. 

It can also take a long time to see a return on your investment if a property initially requires a lot of money to fix it. You may have to rent it out before you start earning your money back. It can also take a while for a property to sell after you’ve invested in it. Though it can yield a high return, it could sit on the market before the right buyer comes along. REITs can suffer from downturns in the market, which can limit the income you receive and depress the value of shares. 

4. Index Funds

Index funds are somewhat traditional but are an easy way to get into investing, as they can provide easy passive income. Those who invest in index funds don’t need to actively manage the stocks and bonds that closely. These funds are made up of stocks that mirror the performance of a market index, like the S&P 500. 

This is ideal for those looking to diversify their retirement portfolio because it doesn’t require you to actively manage your assets and monitor when to buy and sell. Essentially, you or a fund manager would build a portfolio of investments that track an existing index and closely mirror its performance, requiring little to no hands-on management after the portfolio is built. 

This type of investing offers low risk, low expense ratios, solid long-term returns, and lower taxes. The flipside of investing in index funds is that they are vulnerable to market swings and crashes, they offer limited flexibility and no human element to make decisions, and they can result in limited gains. These risks are often worth it, though, especially for those who want an easy way to passively invest. 

5. Mutual Funds

Mutual funds are a portfolio of investments pulled from many securities and assets, such as stocks, bonds, and money market instruments. Generally, the fund is managed by a professional who allocates the fund’s assets. Each share represents an investor’s partial ownership of the fund and the income it generates. 

Mutual fund investors often own shares in a company that makes its business by buying shares in other companies. Investors don’t directly own the stocks or the bonds, but they do share in the profits or losses of the fund’s total holdings. This is why it is called a mutual fund — because the gains or losses are mutually shared by all those invested. 

Mutual funds are beneficial because they give investors the choice to passively or actively manage them, unlike index funds. Overall, they’re a great option for retirement portfolios because they are professionally managed, they provide diversification, they are relatively affordable to buy into, and investors can easily liquidate and redeem their shares at any time. 

One of the biggest pitfalls of mutual funds is that investors have no control over what gets purchased. This means you don’t have control over the assets that are purchased and can lose money if the securities held by the fund go down in value. Mutual funds also tend to come with fees. However, there are often fees involved with any kind of investing, and some investors prefer the lack of control because they prefer to earn passively and not have to constantly make decisions.