Author: Let’s Talk Money! with Joseph Hogue, CFA
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These five alternative investments could help you lower risk and increase return in 2022 even if stocks crash. Find out how to start investing in wine on the Vinovest platform and enjoy investing like never before! https://mystockmarketbasics.com/vinovest
The party may be over on the stock market with most analysts forecasting miserable returns in 2022 but that doesn’t mean you can’t make money. Volatility is returning to stocks but adding alternative investments to your portfolio can actually help produce higher returns while lowering overall risk in your investments. That’s because alternative investments are affected by different characteristics. These are investments outside of normal stocks and bonds that don’t rise or fall when the market tumbles.
In this video, I’ll show you why every investor needs alternative investments in their portfolio and how to find the best to buy. I’ll share a trick to get around government restrictions on alternative investing and reveal the five alternative assets I’m watching right now.
Research by Baird Financial found including alternative investments as 20% of a portfolio lowered the volatility and increased returns. The first chart in the video shows standard deviation of a portfolio over five, ten and 20 years. Now standard deviation is a measure of risk in investments, how much a portfolio or investment tends to rise or fall in any given year. The blue bars here show the standard stocks and bonds portfolio with just over half in stocks and the rest in a bond fund. But look at the brown bars, what happens when you invest about 20% in alternative investments along with those stocks and bonds. In every period here, it lowered the risk in the portfolio.
Again, that’s because prices for alternative assets don’t rise and fall exactly with traditional stocks and bonds. In fact, some of the biggest hurdles to the market this year like inflation may actually help drive alternative assets and investments higher.
But lowering your risk is just one side of this, the other is return and this is where adding alternative investments does something amazing. You see, usually we talk about a risk-return tradeoff when investing. If you want higher returns, you have to accept more risk.
But adding alternative investments to your portfolio, you can actually lower your risk and increase your return. We’re back in that Baird research and the blue bars are the return on that traditional portfolio of stocks and bonds. Look at what happens when we add alternative investments though, that brown bar. Over the five-year period, we lowered the portfolio risk and produced the same return and in the other two periods, you would have actually saw an increase in returns even on that lower risk.
And first is an easy one, looking for the return history of the asset, especially the longer-term history . I’ve shown you that here in each of these five alt investments but there are many more you’ll come across. Use that average annual return with these other factors to make sure you’re earning a return for the investment.
Just as important though, you want to look for the investment’s correlation with stocks . This is how closely the returns of each investment move together and it’s the most important factor in whether an alternative smooths out those stock market crashes or amplifies them. By investing in assets that aren’t closely correlated with stocks, you do what we saw in those two earlier charts, you keep your return higher but lower your risk.
Next to watch for are costs, what are the fees to buy or sell the investment and are there any annual management fees . Now costs to invest in alternative investments are going to be higher than stocks as a general rule but that doesn’t mean you have to pay too much. Compare the fees across platforms to make sure you’re getting the best deal possible.
And one of the most important factors for alternative investments, do you enjoy the investment? These are great opportunities to get something more out of your investments…more than just that financial gain. A Picasso or bottle of fine wine gives you something you can never get from owning shares of stock and that has value.
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.