Exploring Alternatives: Beyond Traditional Investments

Diversification has long been a cornerstone of smart investing — the idea that spreading your money across a range of assets can help reduce risk and support long-term growth. But diversification today looks different than it did a generation ago.

With shorter market cycles, fluctuating interest rates, and inflationary pressures, many investors are asking whether traditional portfolios of just stocks and bonds are still enough. That’s where alternative investments come in.

A New Focus from Washington

Recent discussions from the current administration and the Department of Labor have put alternative assets back in the spotlight. Policymakers are weighing how to expand access to private market investments — such as private equity and private credit — within employer retirement plans like 401(k)s.

The goal is to give workers exposure to investment opportunities that have historically been available only to large institutions and high-net-worth investors.

Supporters say this shift could help savers capture more diversified returns over time, especially in markets dominated by a handful of large public companies. Critics, however, caution that private assets are complex, less transparent, and often carry higher fees and risks than traditional investments.

Either way, the conversation reflects a broader trend: investors are investigating new ways to diversify beyond the standard stock-bond mix.

Private Credit’s Rising Role

One of the fastest-growing segments of the alternative landscape is private credit — lending directly to businesses or real estate projects outside of traditional banks.

Private credit has gained attention for its potential to generate attractive yields, especially in today’s higher-rate environment. As banks have pulled back from certain types of lending, private credit funds have stepped in to fill the gap, offering investors exposure to a different source of return.

That said, it’s not without risk. Private loans are generally illiquid, and performance can vary depending on how the loans are structured and who’s managing them. Still, the growth of private credit reflects a broader evolution in how capital flows — and how investors are seeking income and diversification in a changing economy.

The Debate Over Private Equity in Retirement Plans

Private equity is edging closer to the 401(k) landscape, promising higher return potential but carrying trade-offs that every saver should understand. These funds—known for buying, restructuring, and reselling companies—historically produced outsize gains for institutions and high-net-worth investors. Yet because of their illiquidity, high fees, and limited transparency, they’ve been off-limits to most workplace plans.

Now, with regulators preparing to allow private-equity exposure in target-date and retirement funds, investors and advisors are weighing the pros and cons. Supporters point to diversification—access to thousands of private companies—and long-term outperformance that, over two decades, has beaten the S&P 500 by about 2.5 percentage points. But more recent data tell a different story: the advantage has narrowed sharply in the past ten years and even turned negative in the most recent five.

Critics highlight the lack of standardized reporting, which makes comparing returns difficult, and note that performance metrics such as internal rate of return can be distorted by leverage or early profit realization. Fees are another key factor—where traditional 401(k) stock funds average around 0.26% in annual expenses, private-equity funds often charge 1.5% to 2% plus 20% of profits.

For some investors, limited exposure may make sense as part of a diversified, long-term strategy. But understanding the risk, cost, and liquidity trade-offs will be essential before these complex investments find their way into everyday retirement portfolios.

Why Alternatives Matter

Alternative investments can serve several roles in a well-constructed investment landscape:

Diversification: They often don’t move in sync with stocks and bonds, which can help reduce overall volatility.
Inflation Protection: Real assets, such as real estate and commodities, may hold value better when prices rise.
Income Potential: Strategies like private credit or infrastructure investing can offer steady income streams.
Expanded Opportunity: Access to private markets broadens the investment universe beyond what’s available publicly.

Cautions and Considerations

While alternatives may sound appealing, they also come with complexities:

Liquidity constraints — investments can be tied up for years.
Transparency — valuations and performance updates aren’t as frequent as public markets.
Costs and fees — can vary widely and impact net returns.
Tax considerations — certain vehicles generate income taxed at ordinary rates rather than capital gains.

For most investors, understanding how and when to use alternatives is as important as what to invest in.

The Bigger Picture

At Birch Street Financial Advisors, we view alternative investments not as a trend, but as part of an evolving conversation about access, balance, and purpose.

For some, that means staying focused on traditional investments that already support their goals. For others, it may mean learning about how private markets or new policy shifts could shape future opportunities.

Either way, the goal remains the same: to help investors align their financial decisions with what truly matters — building confidence, resilience, and long-term meaning with their wealth.