The following is an excerpt from The 5 Best Investments You Can Make in 2018, originally published in Kiplingers.
The stock market is the biggest wealth creation machine in human history, and that’s not hyperbole. Stocks give you a little piece of the U.S. economy. So if you’re bullish on America’s long-term future, you’re bullish on the stock market.
But while the stock market might be the best place to park your money over an investing lifetime, it’s not necessarily the best home for it at all times. Consider that from 1968 to 1981, the Dow Jones Industrial Average was flat, not earning a single red cent. In inflation-adjusted terms, they actually lost money. But commodities and gold performed fantastically in those years. From 1971 to 1980, the price of an ounce of gold exploded by more than 2,000%.
The lesson here is not necessarily to buy gold but rather to diversify. Have some portion of your wealth in alternatives that aren’t tightly correlated to the market. That can include anything from precious metals and artwork to rental real estate and even actively managed strategies that zig when the market zags.
“The inclusion of an alternative investment in a portfolio is a form of insurance,” says Endre Dobozy, manager of FTM Limited, a firm specializing in low-volatility alternative investments. “As the global financial crisis illustrated, equites remain diversified until they aren’t. By including an alternate investment in your portfolio that has little to no correlation to the market, you are able to offset a portion of any market losses and reduce the overall drawdown of your portfolio.”
The alternatives space is less regulated than traditional asset classes such as stocks and bonds, so you must do a little extra due diligence here. And never invest in something you don’t understand. But adding alternatives to your portfolio, if done right, can be that magic elixir of higher returns with less risk.
To read the full article, see The 5 Best Investments You Can Make in 2018.