During periods of market volatility, investors may look to alternative vehicles. Here are some options to consider.
2022 was a difficult year for investors, with all three major market indexes dipping simultaneously and taking their biggest hit since the housing crisis of 2008[1,2,3]. Now, even with all three up through the first five months of 2023, volatility and uncertainty are stuck in the back of investors’ minds, possibly pushing them to look elsewhere for more diverse vehicles that have the potential to provide growth and protection.
Though diversification of assets certainly doesn’t guarantee success, it can play a major role in mitigating risk and achieving sustained growth. That’s why it can be a good idea to consider alternative or unconventional methods of investing and saving. Here are a few options you may have when looking to diversify your investment portfolio and avoid the pitfalls of the market.
Traditionally, investing in real estate involves purchasing property with the explicit purpose of renting to tenants for extra income or in hopes that the value of the investment property appreciates. This can be a great way to earn steady income or returns, but it can come with risk. For example, it can be difficult to find tenants to live or work in your rental property, potentially leaving you stuck making a mortgage payment without collecting the rental income. There’s also the risk that the housing market can temporarily go soft, as it traditionally does when mortgage interest rates are high, or crash as we saw in 2008, leaving you underwater with higher property costs than the property’s market value.
Additionally, managing your rental property can be strenuous, whether that’s because of difficult tenants, maintenance costs or other ancillary costs and challenges associated with owning and renting property. It’s important to thoroughly research your investment property and have a plan to cover traditional costs associated with real estate, as well as a plan in the event that it becomes more difficult to find a reliable tenant or liquidate if you want to sell.
There are vehicles for investing in real estate where you are not involved in day-to-day property management, but these options have other risks to consider and should be undertaken carefully working with trusted financial, tax and legal professionals.
Art and Collectibles
Art and collectibles have historically been the province of the wealthy, but they can be used by some investors looking for more fun and creative ways to achieve long-term gains in value. It is, however, extremely important to consider the market demand for art and collectibles. Oftentimes, value is built around rarity or hype, meaning that these types of items can fluctuate greatly in price. For example, a recently deceased artist may command a higher selling price for their art, however, that price may plummet if tastes and styles change after the hype has long subsided.
It’s crucial to have a strong grasp on the market for the art or collectibles you’re looking to invest in, and you may want to only purchase items that you’d feel comfortable keeping at their purchase price point. Then, were the value of the item to drop, you can still enjoy owning it without the fear of taking losses on it as an investment. Additionally, some collectibles, like collector cars, antiques, wine or high-end sports memorabilia, come at a premium price, excluding many retail investors. Modern companies like Collectable and Rally are now giving investors a chance to invest in a portion of classic cars, baseball cards, and comic books, so while you may not be able to drive a 1955 Porsche, you may be able to participate in a fraction of its market appreciation.
Bank CDs and Treasury Bonds
Often looked at as safer investments with low risk and low returns, CDs and Treasury bonds can be a great option for those looking to stay away from markets during volatile periods. The two are similar in that they essentially function as loans. The difference, however, is whom your money is being loaned to. Bank CDs, or certificates of deposit, are lump sum investments with a bank or credit union that are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation, or the FDIC . They then earn interest for the duration of a predetermined period of time. Treasury bonds, on the other hand, are a loan to the government with specified interest rates for durations of either 20 or 30 years .
It’s crucial to know that during times of high inflation, banks usually raise interest rates paid on CDs to make their products more attractive to investors. That means that during periods of high inflation and high interest rates, CDs can be a more attractive investment. At the moment, interest rates are the highest they’ve been since 2008, potentially signaling a good time to purchase CDs . While Treasury bonds also pay a predetermined interest rate over a set period of time, they typically lose value when interest rates rise as newer bonds with higher rates of return become more valuable. Both CDs and Treasurys are seen as traditionally safe and conservative alternatives to the market, but it can be a great idea to speak to your financial professional prior to purchasing either.
Rather than investments, annuities are contracts between you and an issuing insurance company. Annuity contracts (except variable annuities) typically guarantee both principal protection and a rate of growth that is guaranteed by the insurance carrier based on that company’s claims-paying ability. Fixed annuities work very similar to CDs but may pay more attractive interest rates. Other annuities, such as fixed indexed annuities, or FIAs, guarantee growth linked to a specific market index, such as the S&P 500, while still protecting the principal. This means that you have the potential to participate in the upside of the market without falling victim to market downfalls and declines.
It can be extremely helpful to discuss your annuity options with a financial professional who understands annuities and has access to multiple products and insurance carriers in order to find a product that suits your unique situation and your goals. You may be able to find a custom product that is built to conform to your needs and desires, such as providing a stream of retirement income.
No longer is life insurance solely about the end. Now, it can be a beginning with modern product-development companies working to create customizable, client-oriented policies that can function as vehicles for retirement saving and income. While term life only guarantees a payment upon death in a specific time window, permanent life insurance policies, like whole life and universal life, can come with a cash value portion that is accessible tax-free for any reason.
Based on the claims-paying ability of the issuing company, an indexed universal life policy, or an IUL, makes guarantees similar to a fixed-indexed annuity, such as principal protection and index-linked growth. IULs also offer flexible premiums, meaning that the policyholder can increase or decrease premiums by increasing or decreasing the amount that goes into the cash value portion or increasing or decreasing the insurance death benefit of the policy based on their circumstances and comfortability while still keeping the policy in force.
Sometimes it’s all about connections, and when investing in private equity, that’s even more true. Whether it be through a friend, a business associate, a family member or your financial professional, private equity opens even more options for investing in businesses and projects that are not publicly traded.
The downside of private equity is that it often involves larger sums of money than you might invest in, for example, a handful of shares of a public company. It may also be extremely exclusive and only available to high-net-worth individuals or those with connections to the private companies offering a share of the business for capital. It does, however, have the potential to provide greater returns, as you may have the luxury of investing at a company’s inception while conceivably earning dividends later in the investing lifecycle.
*Investing in private equity may require that investors be accredited, qualified or both. For more information, please visit http://www.sec.gov
These are just a few alternative investment options, and just a few of the potential pros and cons. To learn more about how to avoid market volatility and protect yourself from downturns, please visit us online here.
This article is not to be construed as investment or tax advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your investment portfolio. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.
Prime Capital Investment Advisors, (“PCIA”), Private Client Services (“PCS”) and their advisors do not give tax advice. Individuals should consult with a professional specializing in the fields of tax, legal, and accounting regarding the applicability of this information for their situation.