The stock market had an incredible run from 2009 until 2021. Equity values soared as the economy entered its longest expansion in living memory. The period after the financial crisis was one of relative stability, despite stagnant wages.
But then everything changed in 2022. Russian forces invaded Ukraine, the price of gas soared, and all the money printed during the pandemic to pay for various government support schemes came home to roost. It was an unmitigated disaster.
Ray Dalio, the billionaire investor and founder of Bridgewater Associates, saw how stocks and the real economy were heading for a clash. While most investors believe that stocks are a hedge against inflation, he pointed out that there was a need for rebalancing. Asset prices were sky high, he said, while real goods in the economy hadn’t increased in tandem. This, he said, would lead to inevitable inflation as people liquidate their capital and go searching for goods.
In layman’s terms, this means that the market is out of whack. There’s way too much money in stocks, and too few goods circulating in the real economy to prevent inflation from happening. That’s why the price of everything is soaring.
At the same time, there are real structural issues in the economy leading to problems. Energy supplies to Europe are at record lows from Russia. That’s pushing prices up across the board. And there are also emerging food shortages, due to a lack of grain and commercial products on global markets. The planet simply isn’t producing enough food to feed everyone, thanks to supply chain issues, poor climate, and, most importantly, a lack of fertilizer.
Because of this, many investors are looking at investing in alternative assets. Given the problems we face today, the stock market looks almost dead. While it might make new highs, 2022 has been a year of disastrous returns so far, and many investors are getting impatient.
Fortunately, there are alternatives. In this post, we take a look at some of the reasons you should consider investing in alternative assets.
Diversify Your Portfolio
Many people understand the need to diversify their portfolios within an asset class. But relatively few see the value in diversifying between them.
The reason for this is simple: when one stock goes down, all stocks are more likely to go down. The same is true in real estate. If the price of a property goes down in New York, then prices are probably falling in Tennessee, too.
When you choose alternative assets, such as crypto or art, correlation goes down. This means that even if prices are falling in one asset class, they might not be in another.
Investors love uncorrelated assets because it helps them maintain portfolio value and maximize their returns.
Protect Yourself Against Inflation
Owning additional asset classes also improves hedges against inflation. That’s because the amount of overvaluation in some assets is higher, on average, than in others.
Why did the air go out of the stock market so quickly during the first half of 2022 but other assets, like art, remained high? It is mainly to do with the degree of overvaluation. During the pandemic, everyone piled their money into stocks, hoping for big returns. And now they’re selling their shares and converting them into goods, pushing stock valuations down and general prices higher.
The same is not true in the art market, though. Demand remains incredibly high, in spite of all of the incentives to purchase goods in the real economy.
Therefore, diversifying could be a good way to protect yourself against inflation. Even if you hold some assets that will fall in price during inflation, there’s a higher chance that others will gain value over time.
Increase Portfolio Returns
Adding alternative investments to your portfolio is a way to increase portfolio returns considerably. The reason for this has to do with the potential for new asset classes to grow compared to old ones.
Take real estate, for instance, perhaps the oldest asset class. While prices might go up 10 percent per year for a couple of years, they won’t go up 2,000 percent in a decade.
However, the same is not true of other types of investment. For example, if you’d invested in Bitcoin in 2014, you would have made those kinds of returns.
Even within the crypto space, there are opportunities, as an article entitled: What Is Dogecoin? | The Complete Guide for Beginners. People who bought the Shibu Inc.-themed currency before Elon Musk started touting it stood to gain considerably.
Art, fine wine, classic cars, and even commodities all have the potential to make owners fantastic returns over time. That’s because scarcity in these assets is more likely than in, say, real estate or stocks. Prices can skyrocket because of investor sentiment.
Many investments are “accumulating.” That means that returns come in the form of higher prices when you sell. For instance, consider a stock. Most don’t pay dividends anymore. Instead, they just reinvest back into the original instrument, upping the price. The same is true of real estate flippers. The whole point of the activity is to buy a property, renovate it, and then sell it for a higher price later.
But diversifying your investments into alternative assets can also increase direct income. For instance, you might want to invest in rental cars. Here, you make money every time somebody hires out one of your vehicles, providing you with money that you can offset against the loss. Alternatively, you could invest in crypto financing. Here, borrowers pay back the original loan plus interest, providing you with a healthy income every month.
What’s nice about these income sources is that they have virtually no correlation with stocks and bonds. Even if the market is crashing, people will still want to borrow money, rent out cars, or hire vacation lets.
Get Excited Again
Traditional investment portfolios can be quite dull. Not a lot happens. You put money into the markets every year and hope that you’ll get a decent return. Usually, over the long-term, you will.
But as the years pass, it becomes less thrilling. You become less motivated to work hard, save money, and invest your surplus in the markets because things seem to progress so slowly.
With alternative assets, though, you can make investing exciting again. All of a sudden, you have something new to dig your teeth into that could potentially make you a lot of money.
Unfortunately, the future of investing doesn’t look certain. Global economies are facing severe headwinds that simply didn’t exist in the post-war period. The world may be entering a new phase that makes historical stock market returns an anomaly.
For this reason, the classical 60/40 stock-bond split may no longer be sufficient. Investors may need to consider alternative investments to improve their returns and ensure that they can live the life that they want.
The list of serious structural problems facing classic investments is considerable. We’re seeing a split in the global economy between east and west, just like during the Cold War. We’re also witnessing an energy crisis of unprecedented proportions. Raw materials are simply becoming too costly to extract out of the ground, forcing prices higher.
Then there are demographic issues which will kick in this decade. Fewer younger people means less consumption and opportunities to make economies grow. It’s a serious issue.
In this context, alternative assets may be the only way forward for many people. They may be their only hope.