Diversification is one of the central tenets behind crafting a robust portfolio. How you choose to diversify can make a major difference for growth in good markets and resilience in volatile ones. The truth is that diversification in the stock market alone only provides so much protection or upside.
Moving allocations from stocks to mutual funds and ETFs can mitigate your exposure to company-specific downturns, but may still leave you vulnerable to sector-wide losses. Bonds may underperform when interest rates are low, leaving you with little opportunity for meaningful gains. In order to seize meaningful investment opportunities, one has to look toward diversifying through alternative investments instead.
Alternative investing has become a popular portfolio staple for many. As of 2019, 23 percent of investors surveyed were said to include alternatives in their portfolio. Only 7 percent of investors had alternatives in their portfolio two decades prior. There are several diversification opportunities within the world of alternative investments. Each offers something different, making it crucial to know everything about diversifying into alternative investments before you begin.
Portfolio diversification is a must in any economy. In a bull market, diversification avails you to gains across several sectors, which can create significant value. One recent study concluded that a balanced portfolio consisting of US stock, foreign stock, bonds, and short-term investments could provide an annual average return of almost 8 percent, based on historical stock performance.
With market volatility on the rise, diversification has become more crucial than ever. The market swings more dramatically than it has in years’ past. The COVID-19 pandemic’s economic toll on global markets has led to several swings of 1,000 points or more, which can wreak havoc on one’s portfolio on a monthly basis. For example, the travel and hospitality sector experienced a nosedive during the first half of 2020. If your portfolio was too heavily invested in this area, odds are you’d be in for significant losses as a result. These sectors are only beginning to show growth on the hope that vaccine distribution will prompt people to travel safely soon.
By spreading your investment capital around, you can offset the likelihood of being overexposed to significant turbulence in specific parts of the market. And, in bull markets, you can set yourself up for gains across more rising sectors as well.
Diversification through stock ownership across several sectors and economic regions alongside bonds can only do so much to truly diversify your portfolio, however. You might be able to offset losses or increase exposure to gains, but your assets are still tied up in the market with near-exclusivity if you don’t open yourself up to other investment types. That’s where alternative investments can help.
With alternatives, you can invest in a host of assets that appreciate in ways that aren’t directly pegged to market moves. Broadly defined, alternative investments are any kind of investment that isn’t in stock, bond, mutual (or index) fund, or cash. This is just the tip of the iceberg in the world of alternatives: other options include more exotic investments like artwork, rare coins, or fine wines. If you’re new to alternative investments, it’s better to stick with some of the more conventional options though.
Since the world of alternatives is expansive, most investors should stick to a few of the more conventional options out there. Each of the alternatives below offers a different kind of benefit to your portfolio, and picking the right one might be a matter of selecting one (or several) that do more than just give you diversification for diversification’s sake.
Ideally, your alternative investment strategy should also offer a hedge against market volatility and serve a strategic purpose in your overall portfolio.
Gold and silver are perhaps the most well-known alternatives around. Precious metals as an asset class can offer investors a hedge against market downturns, as gold in particular has a lengthy history of retaining its value—or even increasing in value during periods when markets are sluggish.
In fact, gold has an inverse relationship with the ups and downs of the markets. When markets are down, the gold prices tend to increase. For example, the S&P 500 lost half its value from December 2007 to February 2009, while gold rose by 14 percent during the same timespan. This makes gold a great asset to include in your portfolio—be it during turbulent financial periods or periods of calm.
Be aware that getting into gold can come at a premium due to its stability: the price of gold per ounce increased by almost 25 percent in 2020 with an average closing price of $1,393.34.
Commodities are another common option for alternative investors seeking to branch out of the stock market for diversification. Agricultural commodities are vital elements of the economy as well as society itself. Because commodities are so important, they also make for a good alternative investment opportunity. Prices tend to stay consistent so long as supply and demand are balanced. When inflation strikes, agricultural prices tend to increase. This provides an excellent hedge against stock market losses.
The overall value of the American agricultural industry in 2019 was $1.109 trillion when measured in terms of gross domestic product. The sheer size of this economic sector makes it an alluring option for alternative investments. Bear in mind that commodity prices can fluctuate depending on a host of factors, such as changing consumer demand and oversupply.
Real estate can offer investors a unique opportunity to diversify their holdings that may do more than just keep you from putting too much capital in one or several sectors. Real estate value, particularly in areas where property is in high demand, can net you gains that exceed what you’d get on Wall Street.
There are a host of ways that investors can get into real estate. The most obvious is home ownership, particularly if you’re purchasing a home or plot of land for the sake of renting it. The same holds true for development: be it building a home or commercial property. Investors can also participate in a real estate investment trust, which allows participants to own fractions of a property that is managed through a trust. REITs make it easy to invest in real estate without having to take on any of the challenges of being a landlord or developer. Bear in mind, however, that real estate can be a fickle investment, depending on where and when you invest.
Farmland investing is a unique alternative investment option as it combines the best of these three alternatives, as well as others. When investing in farmland, you’re given an opportunity to purchase shares of a working farm. You can then reap the rewards of the farmland’s value as well as the sale of its crops. This provides some of the same exposure as real estate and agricultural commodities combined. Plus, farmland has a track record of maintaining value, making it comparable to gold in terms of resiliency.
When you invest in farmland, you have the ability to generate potential gains from a variety of sources—all without having to put money into a series of different alternative investments. Investing in farmland with FarmTogether also makes it easy to get started: all you need to begin is $10,000 and an account. From there, our team of experts will help guide you through the investment opportunities currently available. You can use our intuitive web platform to track your investments over time, and can contact us with any questions you might have along the way.
For many investors, crafting a well-balanced portfolio goes beyond holding stocks and bonds. Alternative investments can offer more exposure to holdings that aren’t as dependent on overarching stock market trends. This can help reduce the risk of assets losing value when the market is sluggish. Better still, it can also avail you to new opportunities for growth as well.
Farmland can be a great fit for investors looking for diversification through alternatives. FarmTogether makes it easier than ever before to get into the world of farmland investing as well.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.