Stock market investors know that performance comes and goes in the short term but, over time, it’s the cumulative effect that really matters.
And, on the whole, long-term returns for stocks have generally been positive for the last century or so. In fact, since the S&P 500 expanded to cover 500 stocks in 1957, the index has averaged an annual return of about 8%. That includes big-time up years – like +34% in 1995 and +29% in 2013 – as well as years that fared far worse, including 1974’s -29% and 2008’s -38%.
But that’s just publicly traded stocks. Savvy investors know that some of the best returns that are available for their money aren’t available in the usual markets, but from so-called alternative investments that are decoupled from the rest of the economy.
That’s because, although stocks can be great assets during periods of economic growth, returning multiple times their original value, they can also give up much of that value during times of pullback (see 1995 vs. 2008 above). A well-diversified portfolio, then, needs to include assets that aren’t subject to these swings, that are capable of appreciating reliably through any economic climate and delivering solid returns to investors no matter what happens.
Alternative investments are becoming increasingly important as tools for everyday investors to grow their investment returns while simultaneously protecting their portfolios.
According to Blackrock, alternative investments are simply “investments in assets other than stocks, bonds and cash, or investments using strategies that go beyond traditional methods, such as long/short or arbitrage strategies. Since alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk and enhance returns.”
The list of alternative investments can be long, including just about any investable asset, such as:
And these assets can be quite powerful. Yale University famously committed a large portion of its endowment to alternative investments, particularly focused on private equity holdings, in the 1980s, and has to-date seen impressive results. In 2014, for instance, it saw returns greater than 20% from this approach.
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Invesco likes to compare alternative investments to stocks and other assets by using the analogy of the tortoise and the hare.
While stocks (the hare) race to quick but volatile gains, alternatives (the hare) grow slow but steady, eventually outpacing the overall return of the hare by minimizing the down periods.
The bank writes: “During bull markets, alternatives have historically generated positive returns, but those returns have lagged those of stocks. During bear markets, alternatives have historically generated superior returns relative to stocks. For example, during the two-year bear market following the bursting of the tech bubble, alternatives generated a positive return. During the global financial crisis, alternatives posted a negative return, but didn’t lose as much as stocks did.”
And the numbers bear this out.
According to a report published by Quaker Funds: “Since 1990, the average annual return of seven [popular] alternatives was 10.39% with a standard deviation of 6.70%. Not only did this group of alternative strategies annually outperform the S&P 500 by 94 basis points, it did so with approximately 55% less risk (as measured by standard deviation). These attractive risk-adjusted returns are what some sophisticated investors are seeking.”
On the whole, the S&P 500 averaged a 9.37% return between 1990 and 2013, while a 50/30/20 Equities/Bonds/7 Popular Alts portfolio returned 9.22% By going more active with the alternative investments and focusing more on event-driven assets, that figure jumped to 9.41%.
Masterworks is bringing the power of alternative investments to all, opening up the door to the lucrative and growing market for “blue chip” art. After all, art has long been one of the best investments of all time, returning 10.6% in 2018 while the S&P declined 5.1%. The Wall Street Journal even called art “the best investment of 2018.”