Stocks are often the go-to investment, but allocating some of your capital toward alternative investments can introduce new opportunities and act as a hedge in case the stock market experiences a downturn.
Gold and crypto are two popular alternative investments, and cash is another option for investors looking to take some risk off the table. Here’s what to know about each asset so you can construct a portfolio that aligns with your goals, time horizon and risk tolerance — and sleep better at night.
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The value of diversification
Alternative assets can offer your portfolio diversification, which is key to a strong portfolio. Diversification involves having a mix of assets such as stocks, bonds, cash and alternatives, as well as having variety within those assets classes. For example, your stock investments should include shares of large and small companies, domestic and international ones and companies in a wide array of sectors.
Diversifying your portfolio can help minimize your losses during stock market corrections, since all your assets ideally won’t behave the same way.
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Assets to consider
If you have money to put to work and don’t want to allocate it to stocks and bonds, here are some other options.
Cash
With cash, you don’t have to worry about your money losing nominal value due to market corrections and fluctuating asset prices. Financial advisors typically recommend keeping enough cash on hand to cover three to six months’ worth of your expenses should the unexpected happen.
However, cash isn’t risk-free. The two issues with going all-in on cash are opportunity cost and inflation. Opportunity cost reflects the money you could have made with the same cash if you put it into an asset like an index fund that produced an annualized 10% return. Inflation refers to the steady rise of prices that chips away at your purchasing power.
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Gold
Gold’s price movements typically aren’t correlated with the stock market. In fact, gold can rally due to the same factors that would result in the stock market drop. For instance, economic uncertainty and high inflation can attract investors to gold, sending its price up.
You can choose between physical gold and exchange-traded funds (ETFs) that track the price of gold. Another option is investing in gold mining companies that heavily rely on gold prices to deliver profits and revenue growth.
But keep in mind that gold prices can be volatile, and you’re taking on risk when investing in the precious metal. It also doesn’t generate cash flow and may trail stocks during prolonged rallies. That’s why experts suggest a small allocation toward gold, typically no more than 5-10% of your portfolio.
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Crypto
Cryptocurrencies such as bitcoin and ether have gained a lot of attention in recent years thanks to their volatility that can lead to prices soaring one day and dropping the next. Because of its volatility, crypto can offer significant returns, but it's also a risky asset. Advisors tend to recommend keeping your crypto investments to 5% of your overall portfolio, with many calling for an even smaller allocation.
