The stock market is one of the greatest creators of wealth. That's true, but it's not the only game in town. Real estate, commodities, collectibles, things like cryptocurrencies, and even owning your own business are other modes of investment differentiated from stocks.
Historically, a lot of alternative assets carried more barriers to entry for the average investor. These days, the rise of specialized funds, trusts, and other avenues is making those investments more accessible.
Benefits of alternatives
If you make good picks, there really isn't a better alternative to the stock market in terms of just creating gains. Zoom Video Communications brought shareholders returns of 300% in a year's time. In a five-year period, Amazon shares have gained 1,500%. There are not a lot of alternative assets that can do that. And the housing market is thought to have returned around 3.7% annually from 1928 to 2013.
In comparison, the S&P 500 usually does around 10% to 12% per year. Over the long haul, common inflation hedges like gold also underperform.
So why not just put everything into individual stocks?
Alternative assets like real estate, commodities, and collectibles perform to some degree independently from, or even in opposition to, the stock market. This helps you hedge risk against the potential downturns in stocks.
When you look at something like SPDR Gold Shares (GLD 0.09%), an exchange-traded fund (ETF) that has actual gold reserves as assets, you'll see that the commodity has the ability to drastically outperform the market in shorter time frames, especially in times of trouble. The ETF drastically outpaced the market going into the Great Recession, and continued to do so for several years.
Commodities operate on economic factors around supply and demand, with less speculation than is involved in buying stocks. Something like gold or silver is considered very low-risk, and creates stability for a portfolio.
If you look at the tough year of 2020, home values actually increased as low interest rates made mortgages more affordable. Real estate itself is probably one of the most commonly used forms of alternatives.
A large percentage of people own homes, giving them an asset of utility for their lives, and a form of equity to build over time. Perhaps one of the best benefits of this type of investment is that you actually get to use it.
Downsides of alternatives
Historically, alternative asset classes have been more difficult for the typical retail investor to invest in. How much gold can you buy? How many vintage cars can you store? If you invest in wine, are you going to dig a cellar in your yard to store and age it? How can you manage the time and financing for building out a real estate portfolio?
Okay, I'll admit the car thing remains a problem. Other alternative assets, however, are becoming more and more accessible to the common investor.
One of the biggest issues with alternative investments is liquidity. In the aforementioned case of housing prices rising, what is great for owners in one way is detrimental in another. With housing at such highs, it naturally becomes harder to find buyers.
It's a lot easier to sell $250,000 worth of General Motors stock than it is to sell a $250,000 house. The former can be done in a day. The latter can take months, if not longer.
Removing the cons from the equation
Through ETFs and mutual funds focused on alternatives, investors can now gain exposure to alternative assets all within the realm of their brokerage account. You don't have to go buy real estate. You can invest in real estate investment trusts, or REITs, that offer investors the ability to gain returns from housing or commercial buildings. A popular option these days is Medical Properties Trust (MPW 0.97%), which invests in healthcare-related real estate.
The beauty of stuff like this? You're not buying homes or commercial buildings. You're not responsible for managing them, or covering the taxes and payments. You're simply investing into a small cut of the entity that already is.
As pointed out earlier, you can invest in gold ETFs like SPDR Gold Shares, or silver through something like the iShares Silver Trust (SLV 0.42%). Aimed at following the price fluctuations of silver, this ETF is up more than 50% over the course of a year, outpacing the S&P 500 by around 25%.
Technology and innovation are even starting to crack the mold on the very specialized alternative asset classes. Vinovest, an online platform acting as a sort of brokerage for wine investing, allows investors to gain access to a market that has strong historical returns.
The company handles the storage, insurance, and selling of your portfolio all for a 2.8% fee, making liquidation of assets much simpler. It also handles the investment process through a staff of portfolio advisors, sommeliers, and industry analysts.
This is just one example of relatively undiscussed segments, but it packs some compelling returns. The Liv-ex 1000, an index of 1000 wines that is tracked by The London International Vintners Exchange, has returned just under 45% in five years, or 9% annually.
More selectively, the exchanges' Burgundy 150 index, tracking wines from the Burgundy region of France, has returned 85% in that same five-year window. That's fairly comparable to what the S&P 500 produced over the same period, making wine a compelling alternative play.
Vinovest co-founder Anthony Zhang was kind enough to discuss the industry with me, and noted the increasing interest from retail investors. Their business hit $25 million in assets under management in 2020 alone, and the company is now forecasting that figure to hit $100 million over the next 12 months, with the average portfolio being owned by nonprofessionals.
This is just one example of how alternatives are becoming more and more available to the typical buyer.
A balanced portfolio
At present, you can't beat stocks. They're simply the best all-around form of investments to create gains. There is an abundance of research and data available for thoughtful investors to base their decisions on, and the gains on individual equities can simply be life-changing. The catch is significant volatility and risk.
That is why investors need to look to diversify with some alternative assets as a piece of their overall strategy. Real estate is a valuable asset. They're not making any more of it.
Metals like gold, silver, platinum, and cobalt are all needed for industrial purposes, making them increasingly useful for products. The ongoing development of car batteries is an example of where these types of commodities are getting used.
In terms of gaining access to this stuff, there has never been an easier time to do so. You can create a fairly strong holding of alternatives simply by investing in ETFs. One can of course still go the more traditional route, and buy buildings, homes, and jewelry, but there's a lot more involved, and it drastically decreases the liquidity of your investment.