Legendary investor Warren Buffett has long advocated for investors to put money into companies they intend to own for life. His advice was reasonable at a time when one could expect to generate significant returns by simply throwing money into the stock market and watching it grow for decades. But present-day investors know that times are much more turbulent now, with record-high inflation. There’s good reason people are turning to alternative investments.
Here are five reasons investors are seeking alternative investment opportunities.
1. Inflation
Inflation really is taking a bite out of the economy right now. According to Bloomberg, inflation is at a 39-year high in the United States. And it shows no signs of slowing down.
U.S. consumer prices soared last year by the most in nearly four decades, sapping the purchasing power of American families and setting the stage for the Federal Reserve to begin hiking interest rates as soon as March.
The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
– Bloomberg
Many average Americans are buckling under the pressure of steep rises in essential goods such as groceries and gasoline. Even those fortunate enough to set aside money for investments need to find those that can outpace inflation. Returns must be significantly higher than average to compensate.
2. Portfolio diversification
It is common knowledge that investors should not put all of their eggs in one basket. Thus, portfolio diversification has always been a safeguard against being overly reliant on any singular investment.
Alternative investments offer an intriguing opportunity to become involved in new investing opportunities while also diversifying your portfolio. By diversifying your portfolio with alternative investments, you’re not fully betting on the stock market to carry you through ups and downs.
3. Stock market volatility
Some investors cite the last few years of stock market volatility as the reason for wanting to expand into alternatives right now. The stock market has become completely unpredictable with the start of a war, the pandemic and its effects, supply chain issues, and even the chronicles of meme stocks.
Let’s look at the saga of GameStop in early 2021. A group of Reddit meme posters and others casually interested in investing helped take a previously left-for-dead stock into the stratosphere with plenty of turmoil along the way.
Keith Gill, the investor, made most famous by the GameStop runup for the massive profits that he made and for his relentless promotion of the stock, stated that even he had been taken aback by everything that transpired.
“This story is so much bigger than me,” Mr. Gill told The Wall Street Journal in his first interview since the unboxing this week of a volatile new stock-market game. “I support these retail investors, their ability to make a statement.”
But events like these can all become too much for the average investor just trying to earn reasonable returns. Thus, some are looking to alternative investments to avoid the unpredictable ups and downs of the stock market. Even so, it’s important to note that investors should be aware that alternatives can also face extreme volatility.
4. Greater returns
Private equity has consistently outperformed the S&P 500 for the last decade. Additionally, private equity performance does not coincide with the stock market. This is why more and more investors are turning to private equity right now.
The unfortunate part about private equity, though, is there are typically large investment minimums in addition to high management fees. Hopefully though, with the rise of new technology and regulations, private equity can become more available to everyday investors.
5. Community
Nobody should invest in something just to have something interesting to discuss at a dinner party. But discussing your investments with others who share the same interest is a fun part of investing.
Thus, some enjoy investing in alternatives to be part of certain communities that are gaining traction. Some of the most heavily discussed alternative investments right now include:
These types of investments are far different from the mainstream of stocks and bonds. But that’s what makes them so enjoyable and exciting to discuss among others.
The bottom line
Proper research and due diligence are necessary to spot the best investments from the growing list of alternatives. But it can be done. Those willing to put in the work to make it happen might be handsomely rewarded for their efforts.
Overall, during such a great period uncertainty like the one that we’re currently experiencing, it’s no surprise investors are expanding into alternatives to hedge against inflation and volatility.