Complementary to private retirement provision?
3 min readEven in 2023, private retirement provision will not become any less relevant. Although politicians are already talking about introducing a return on stocks, this will not have a major impact on pension levels for the current generation of workers.
For this reason, each of us should start building wealth early on. Stocks, ETFs and crypto assets are not the only options. Interested private investors have also been able to invest in alternative asset classes for a number of years.
Retirement provision needs alternatives to stocks and ETFs
Stocks, ETFs and crypto assets have been gaining popularity among those looking to build their own retirement savings for years. Young people between the ages of 25 and 35 in particular have recognized how important it is to build up wealth early on, given the constantly falling pension level. Part of the population seems to have woken up to this.
Unfortunately, numerous studies still show that the level of Financial education in the world is associated with a lot of catching up to do. Many private investors invest in asset classes whose risks they do not understand or which in no way promote the intended investment goals. In my view, the pure focus on stocks and ETFs is no longer sufficient to build up wealth in the long term. Of course, established companies belong in the depot – but not exclusively. Apart from medium-sized companies or technology stocks from the NASDAQ, crypto assets and alternative asset classes should also play a role in long-term wealth accumulation.
We have to keep up with the times – and that includes innovative asset classes. The fear of high volatility is unfounded with the right asset allocation and smart diversification.
Asset tokenization is democratizing alternative asset classes
It is clear that crypto values should play a role in private retirement provision. Investors do not have to make high weightings at this point – even a 5 percent shift to crypto assets such as Bitcoin, Ethereum or Cardano can already have a positive impact on the risk-return profile (Sharpe ratio) of an investment portfolio due to the asymmetric risk profile of crypto assets .
Aside from crypto assets, asset tokenization offers exciting asset allocation alternatives. Asset allocation means the distribution of assets across different asset classes. With the tokenization of assets, ownership rights to assets that were previously difficult to access (e.g. vintage cars) are digitally mapped on the blockchain. These can then be divided into any number of tokens and traded. The division process means that even private investors with small investment sums can invest in alternative asset classes. If you want to buy a classic car or a work of art, you have to raise large sums of money beforehand. In addition, the purchase process was very bureaucratic, lengthy and expensive.
The following asset classes can be made investable through asset tokenization:
- Antique car
- Artworks
- Wine
- Property
- Luxury watches
- Private equity
- Tangible assets and collectibles
There are already a number of fintechs that offer investments in alternative asset classes via tokenization.
Private equity has consistently outperformed the global stock market over the past 20 years. Vintage and luxury watches have also recently recorded massive price increases. The return opportunities exist and can now be used by anyone. Due to the high risk of loss, a gradual entry is recommended.
Low correlation with overall market beneficial for diversification
Alternative asset classes generally exhibit a lower correlation with traditional markets, which makes them particularly attractive in the context of portfolio diversification. With a reallocation, the entire portfolio can be made more resistant to market fluctuations. Due to the additional emotional attachment to alternative asset classes (e.g. classic cars), the sensitivity to price losses in the traditional markets is far lower.
Private investors should nevertheless be aware of the investment risks. Just because values are less volatile doesn’t mean the risk of loss is small. Alternative asset classes can also lose massively in value overnight. For this reason, investors should only start with a small weighting here and find out about all investments in advance before they are made.
A broad diversification of assets across different asset classes can lead to the total return being stabilized. Before making an investment, you should always consider whether an investment in alternative asset classes is suitable for your individual investment strategy and risk profile.
