Why Alternative Investments Have Historically Prevailed in Volatile Markets
Market volatility is the bane of nearly every investor’s portfolio (unless you’re big on options trading, of course). We all want to see steady growth for our portfolio; and if we can’t have steady growth, a sluggish market is at least predictable and easier to hedge against. Unfortunately, we can’t always get what we want—especially if years of growth have slowed and unprecedented global disruptions followed soon thereafter.
Although volatile markets are notoriously hard to plan against, there are ways in which savvy investors can diversify their portfolios to try to help even out its performance. Some of these options, such as mutual funds and bonds, can serve as loss-leaders or offer nominal gains. Others—particularly those in the world of alternative investments—can do more than merely stave off market fluctuations. Picking the best alternative investment to soften the blow of volatile markets is key, however.
Where Conventional Investments Fall Short
Stock market trends may affect sectors differently, but a volatile market tends to have a chilling effect on overall index value and growth. Whenever a market shifts by more than one point in a short period of time—be it a day, week, or longer—that signals that a volatile market may be in the offing.
For example, a shift in market value of a percentage point or more used to be a monthly occurrence at maximum. But by 2002, these 1 percent days began to appear at a rate of almost one per week. In 2020, several stock indices have lost 20 percent or more of their overall value in a two-week span as we saw back in the spring.
Even when some sectors do well in an otherwise unstable market, volatility ultimately affects more holdings than not. This means that even diversified, stock-heavy portfolios can feel the downward pull of a turbulent market. Mutual funds that are big on stocks aren’t immune from this phenomenon, either.
Why Alternative Investments Prevail in Volatile Markets
Alternative investments encompass a wide array of opportunities to grow your portfolio outside of stocks, mutual funds, and bonds. These assets can include precious metals, real estate, commodities, and even rare items like artwork or wine vintages. As a result, alternatives do not fluctuate the same way that the stock market does. The price of a Rembrandt doesn’t drop because the energy sector dips—and that’s why alternatives can be a great option for diversification when market volatility is on the rise.
Some alternative investments even move contrary to the markets. Commodities, for example, tend to increase in value during inflationary periods as the price of grains increases. Gold and other precious metals also appreciate when markets are shaky as their value has historically stayed steady, and the role they play in manufacturing remains critical despite market conditions.
Picking the Right Alternative Investments for Your Portfolio
Every alternative investment comes with its own pros and cons, both on a personal level for your investing strategy as well as macro trends in the markets. Some are more volatile in their right, or are more easily influenced by the ups-and-downs of the market. This makes it critical to pick the right alternative investment for your own appetite for risk and the amount of market exposure you’re comfortable with.
Here are some of the most common alternative investments to help soften the blow of volatile markets.
If you’re looking for an investment play that’s notoriously stable in value, excels when inflation is on the rise, and offers exposure to real estate, then farmland investing is for you. With farmland investing, you become a co-owner of a farm of your choosing—this means you reap the benefits of appreciated land value as well as the value of the crops sold at harvest. This means you can enjoy several sources of potential revenue from your investment, all while avoiding market volatility.
FarmTogether makes the farmland investing process easier, too. All you need to get started with our platform is a $10,000 commitment. With that, you can access our robust digital platform that lays out all of the investment opportunities currently available. Each opportunity offers a different rate of return, crop type, and location—all of which have been vetted by our team of investment experts.
Commodities are another common option for investors looking to avoid market volatility. With commodities, you’re investing in goods like corn, wheat, or crude oil. The value of commodities tends to increase when markets are shaky, since many investors start looking for an exit from the stock market. Plus, when inflation is on the rise, commodities offer an opportunity for investors to actually make a return as higher commodity prices mean more valuable assets.
Gold gets a ton of attention as one of the most popular alternative investments around. Gold, like farmland, has a strong track record of either maintaining or increasing in value when markets are uneasy. Other metals, such as silver, are comparably stable as well. One issue with gold, however, is its own volatility: the price of gold fluctuates in ways that don’t inherently match the stock market, but can still cause anxiety for those who own gold as a short-term holding. Investing in gold may be exchanging one kind of volatility for another—something you’re looking to avoid in the first place.
Where Alternatives Fit in Your Volatility-Proof Portfolio
Volatility is an unfortunate and unavoidable element of investing. If you stay in the market long enough, you’re bound to hit a period of turbulence. How you react and build resilience into your asset allocations can help make a significant difference in how much volatility ends up affecting your portfolio’s value.
By venturing into alternative investments, you may be able to shift your investments into areas of the economy that aren’t directly affected by the ebbs and flows of the market. Many alternatives—farmland investing being one of them—fare well no matter what sentiments pervade on Wall Street. The historically stable growth of farmland value, paired with the tendency for alternatives to increase in value during recessions, can help offset the negative repercussions that volatility might have on your stock and mutual fund holdings.
FarmTogether makes it easy to get started in the world of alternative investments. All you need is $10,000 to start, and you’ll be paired with one of our financial experts to assess your options. FarmTogether’s robust portfolio of investment opportunities means there’s likely to be a great fit for your goals—better still, our platform makes it easy to pick and monitor your positions.
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.