4 Investment Alternatives to Equities

In general, many investors are reactionary. They tend to pull out of investments after the bottom has dropped out of them, or buy into something that has already had a pretty good run.

These last six months are perfect example. Pre-election, many investors felt skittish and moved to cash with part or all of their portfolio. There was a bit of dip with the post-election low for the Dow showing on November 15^th at 12,542. However, the market closed on February 21, 2013 at 13,880. The cash is flowing back into the markets, but is it too late?

The clichéd line is: “Time in the market, not timing the market.” While an obvious hedge against the equity market is fixed income, there are other ideas that help investors protect against the down-side of the market because of their non-correlation to equities.

1. Commodities

While recent history would say otherwise, commodities over time have been a great non-correlator. The running price on oil has been a major driver in this, but there are Broad Basket commodity investments in both mutual fund and ETF form that spread over the entire spectrum. These investments allow you to invest in everything from grains to coffee, gas and oil, all the way to orange juice. There are also sector-specific investments if you would like to bet on a certain idea.

2. Currencies/Precious Metals

Gold has been a hot topic for as long as anybody can remember, but every time someone thinks it has lost steam, it goes on another run. It can be purchased by buying the actual bullion, gold ETFs, ETFs for the mining companies that retrieve it, etc. Silver, while not nearly as lucrative as gold, has also done pretty well over the last few years. There are precious metals ETFs and mutual funds that let you take advantage of these two as well as others like copper and platinum.

While currencies have been an investment for countries and institutions for years, it is becoming more and more accessible to the retail investor. PIMCO, the world’s largest bond company just launched a new currency ETF for those that want to bet against the weakening dollar. There are other investments out there like this, so if it interests you, do some research to see which one is the best fit.

3. Long-Short

Long/Short investing has long been a staple of hedge funds. The idea is to go “long” or buy a security that you think will increase in value, while also selling “short” other equities that you believe will go down (Selling short is selling a stock you do not actually own with the idea of buying it later at a lower price. The danger is if that stock does not go down, at some point you will have to buy it back to cover the short position at a price higher than where you sold it). If you look around, you will find hedge fund companies that have gotten into the ETF and mutual fund business. This strategy is now available to the retail investor without having to place the short sales themselves.

4. REITs

REITs, or Real Estate Investment Trusts, have left a bad taste in many investors’ mouths. Some have been taken advantage of by financial advisors, who sold them an illiquid investment they are stuck with. Others have seen the real estate market plummet more than the stock market, giving them a one-two knockout punch to their retirement savings. If one were to think about global REITs where other countries are seeing success, this may not be a bad idea for the right portfolio.

These four ideas are in no way a replacement for an entire portfolio. Used strategically, they can help protect in a volatile market. They are not right for all investors, but if one does intrigue you, do some research to find the best investment that fits your need. A little research can go a long way. Good luck!

Which investment alternative are you most interested in? Leave a comment!

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