Get Out of the Stock Market and Into These Alternative Investments

posted on 06-07-2019

If you're looking for ways to reduce your exposure to the wild swings of the stock market, maybe it's time to consider moving your money out of stocks, and into some of these alternative investments. At the very least, exposure to alternative asset classes can balance out a portfolio, leading to a substantial decrease in its volatility. 

Here are some of my favorites:

When inflation besets the economy and the dollar starts to lose its value, gold is traditionally the best proverbial mattress in which to stuff your cash. Between 1976 and 1980 inflation rose at a rapid +8.84% per year, a  significant move by any standards. This means that if you had literally stuffed your cash in a mattress during this decade, it would have lost nearly -30% of its purchasing power!

On the other hand, the value of gold increased +369% during the same period (after correcting for inflation). As soon as investors regained confidence in the dollar, gold bullion quickly lost nearly -50% of its peak value. Still, investors who got in before the bubble made a handsome profit.

To compare, gold appreciated +109.3% from 2006 to 2010. This time the gain was due to increased uncertainty surrounding debt and equity markets alike. During the previous great spike in gold prices, it was more difficult to jump on the bandwagon, as the only way to gain exposure to the commodity was to own physical bullion. Today, it is easier to own gold through an investment in an ETF such as SPDR Gold Trust (NYSE: GLD) or via options and derivatives.         

Real Estate
A key part of realizing the American Dream is home ownership. Leading up to the Great Recession of the late 2000s, politicians and lenders realized this and enacted policies that quickly drove up the percentage of Americans in homes. Well, as we are now well aware, these seemingly benevolent actions in effect distorted financial and real estate markets to the point of collapse. The average 30 year fixed mortgage rate is still near historic lows and anyone who has ever bought a home knows that this is the perfect opportunity to refinance and lock in an incredibly low rate.

Of course, there are several different ways to invest in real estate. If you have the capital, you can always buy properties and lease them out, but this can quickly become strenuous and time consuming. If you aren't retired or looking for a new career, another real estate investment vehicle is a Real Estate Investment Trust (REIT) corporation investing in real estate that doesn't have to account for corporate tax, but in exchange is mandated to distribute 90% of income to investors. Essentially, it is a mutual fund investing in real estate rather than securities. And just like securities, REITs can be publicly traded, allowing any investor to put some real estate in their portfolio.

An alternative to making money by obtaining equity in a company (buying stocks) is to loan money to a company by purchasing corporate bonds. Bondholders receive payment before stockholders in the event of liquidation, and therefore bonds are considered less risky than stocks. They have a predetermined payout and time horizon, whereas the return on stocks is subject to market forces. If you can't stomach the risk of stocks in a tumultuous market, corporate bonds provide you with a more conservative approach to investing in American businesses.

Another type of bond is the prototypical "flight to quality" in times of economic distress. This is the U.S. Treasury Bond, the return of which is known worldwide as the "risk-free rate." The name says it alone; no one in their right mind expects the U.S. government to default on its debt (if they do, we have bigger concerns than a faltering stock market). [To learn more about investing in Treasury Bonds during difficult times, read U.S. Treasury Bonds Offer Stable Returns in Difficult Markets.]

Wine first gained status as a store of value when Napoleon demanded a classification system for the best French Bordeaux wines. The result was the Bordeaux Wine Official Classification of 1855, which gave those with large collections a basis on which to evaluate the quality of their amassments. Since then, aficionados have kept close tabs on the value of their inventory, rather than drinking it to oblivion.

Today the wine market has become as sophisticated as the commodity itself; several indices now exist to track baskets of wine prices. Below is a chart, courtesy of, plotting returns of the Fine Wine 250 Index against the Dow Jones Industrial Average during the last 15 years. As you can see, the wine index has improved nearly +75%, while the DJIA has been flat.

Now, we're not suggesting that you go out and spend your retirement on a collection of wine, but it could be a great way to store your money in uncertain times.

Donate to Charity
Returns don't always have to be measured by dollars and cents. Why not catch up on your charitable giving in a time when your money won't earn you much elsewhere? Warren Buffett and Bill Gates recently secured pledges from over 40 billionaires to donate at least half of their fortunes to charity, with Buffett himself pledging 99% of his wealth.

The best thing about donating to charity is, of course, the personal gratification you will receive from your philanthropic deed. Coming in a close second is the tax write-off. The IRS regulations governing exactly what and how much you may write-off can be a bit confusing, so here are a couple of are articles offering advice on how to maximize the benefit of your charitable giving: How to Leverage Your Gifts to Charity and Shrewd Philanthropy: How to Give Without Getting Taken.

And if you are the type of person who enjoys filing your own taxes, here is the IRS's official stance on the matter.

Private Equity
In the stock market you are able to purchase equity in publicly-traded companies. In times of uncertain economic conditions and changing governmental regulations, these equities can see shaky returns. A good alternative would be to invest in private equity.

Since most private equity firms require a substantial minimum investment (usually in excess of $250,000), these funds are out of reach for the typical investor. The easiest way to go about investing in one of these firms is by purchasing shares of a business development company. Essentially, this type of investment allows you to gain exposure to small, start-up companies through a financial intermediary. [To find all the details about business development companies, read: 21 Business Development Companies With Sky-High Yields or Why Invest in Business Development Companies?

Index ETFs
We already mentioned one popular ETF allowing investors to gain exposure to gold, but these instruments have more useful applications than mimicking commodity prices. Certain ETFs are structured to move in tandem with a particular stock index. This means there are ETFs linked to any type of basket of stocks you can imagine: small-cap; large-cap; growth; value; German; Latin-American... The list goes on.

Especially useful during times of economic recession is a class of ETFs known as inverse ETFs. These are engineered to move in the opposite direction of a stock index, e.g., if the DJIA climbs +2% in a day, an inverse ETF tracking that index would fall -2%. These vehicles are great short-term investments for when you are confident the market is about to lose ground, but not so great in the long run, during which an index is unlikely to face significant losses.