You’ll have to excuse stock market investors if they wake up each morning asking, “What fresh hell is this?” The stock market of 2020 has not been for the faint of heart. The S&P hit an all-time high in February, only to plummet more than 25 per cent in March. At the end of August, it was back to a new historical high. Meanwhile, each day has been a roller coaster fuelled by presidential tweets, coronavirus counts, vaccine trials, and senate hearings.
It’s not unsurprising investors might be wondering if there is something better out there. Somewhere calm and nice, where one might park a bit of money and make a decent, reliable return. Fortunately, there is: alternative assets.
Certainly, the stock market is not the only place to earn a decent return: the 20-year average annualised returns of REITs and gold were 9.9 per cent and 7.7 per cent, while stocks and bonds returned 5.6 per cent and 4.5 per cent respectively.
In the world of big money, such as pension funds and other institutional investors, alternative asset classes typically refer to hedge funds, private equity and infrastructure. According to The Financial Times of London, “The logic is that they offer some form of diversification from traditional assets. In theory at least, such ‘uncorrelated’ returns hold out the possibility of a bump in performance for each unit of risk a fund assumes.”
However, as Investopedia points out, an alternative asset is a broad category meaning “an investment that does not conform to the traditional asset classes of stock, bond, or certificate.” For individual investors, this might include real estate, commodities or currencies, including gold and bitcoin. For some investors, their alternative assets might be valuable collectibles, such as works of art, precious jewels or bottles of fine wine.
The trickiest part of alternative investments is liquidity. With stocks, investors have the advantage of a daily marketplace of active traders, making it simple to instantly buy, sell and value one’s holdings. In contrast, according to Investopedia, “There is no central exchange pegging the value of a first edition of ‘The Amazing Spider-Man’ or a mint-condition Honus Wagner trading card on a daily basis, so the value of your collectibles will have to be guesstimated using trade publications and previous sales data—and even then, the market can swing wildly if a collectible is found to be less rare than originally thought. Generally speaking, these types of alternative assets are traded by people with a passion for them beyond the profit motive.”
The good news is ‘hard assets’, such as real estate, are the middle ground. While buying and selling a piece of property takes more effort, time, and commission fees to transact than trade Apple shares, most real estate is relatively liquid and market values are fairly transparent.
Long term stock market investors can do well by staying invested and riding out the inevitable bumps along the way. Yet diversification is essential. A well-balanced portfolio with a healthy mix of equities, fixed income and alternative assets can help quell any stock market nausea and help investors sleep more soundly at night – which is the best return of all.