Alternatives to Stocks: Is it Time to Diversify Your Portfolio?
Investors have long held the belief that there is no alternative to stocks when building a portfolio. But after the series of sell-offs in 2020 and choppy market performance this year, many are starting to look for alternatives to stocks. Is it time to diversify your portfolio? In this article, we’ll discuss why investors are seeking alternatives to stocks and what types of investments are becoming more attractive.
Introduction
The stock market took a beating in 2020, with the S&P 500 declining 19%. Although it saw a bounce at the start of this year, the market is still uncertain and many investors are looking for safer options. The economy’s potential for a recession and rising interest rates have driven the shift in mindset towards alternatives to stocks.
Factors Driving the Shift in Mindset
There are two main factors driving the shift in mindset towards alternatives to stocks. Firstly, there is a lot of concern about the economy’s potential for a recession and how it will affect corporate America. The stock market heavily relies on corporate earnings, and if the economy were to go into a downturn, other markets might offer a safer return than the stock market.
Secondly, interest rates have continued to rise. The Federal Reserve has indicated that they plan to raise interest rates a couple more times this year, making other assets such as bonds more attractive to investors.
Bonds are offering higher yields compared to stocks, making them a compelling alternative.
Alternatives to Stocks
Bonds
Bonds have always been a popular alternative to stocks, and this trend is only increasing. Bondholders are guaranteed to get 100% of their return on investment if they hold the bond to maturity, plus the interest payments over time. With interest rates rising, bonds are now offering high yields in the mid-single digit range, which is more than what they have been offering in the past.
Emerging Markets
Emerging markets are another area that is attracting investors. These markets have developing economies, such as China, Africa, and South Asia. Investors are finding opportunities in stocks, bonds, and real estate in these markets to be more compelling compared to the stock market.
Cash and Cash-like Investments
Cash and cash-like investments are also becoming more attractive to investors due to the uncertainty in the economy. With interest rates rising, cash and cash-like investments are offering higher yields compared to the stock market. This offers investors a safety net in uncertain times and the peace of mind that they have a little bit of cash in their accounts to fall back on if needed.
How to Take Advantage of Alternatives?
Investors are being advised not to pull all their money out of the stock market, but to gradually shift the mix of assets they have. This can be done by shifting investments from US stocks to emerging market stocks or by putting a bit more money into cash.
The easiest way for individuals to invest in alternatives is through ETFs and mutual funds. These are run by institutions and fund managers who handpick the investments in the fund. This makes it easier for those who do not have a day-to-day focus on trading to invest their money.
| Alternatives to Stocks | |
|---|---|
| Bonds | Debt securities that pay interest and return principal upon maturity. |
| Emerging Markets | Countries with developing economies offering potentially higher returns but also higher risk. |
| Cash and Cash-like Investments | Low-risk, short-term investment options with stability and liquidity but lower returns. |
| ETFs and Mutual Funds | Investment vehicles that pool money from multiple investors to purchase a diversified portfolio. |
| Money Market Funds | Mutual funds that invest in short-term debt securities offering higher returns than savings accounts but still considered low-risk. |
The current state of the stock market and rising interest rates are driving investors to look for alternatives to stocks. Bonds, emerging markets, and cash-like investments are becoming more attractive due to their higher yields and potential for a safer return on investment. Investors are being advised to gradually shift the mix of assets they have and invest in ETFs, mutual funds, or money market funds to take advantage of these alternatives.
