In their latest survey, the American Association of Individual Investors found that individual investors’ exposure to the stock market is at an all-time high, with allocation to equities at 70%. Compare that to the historical average of 61%.
Two main reasons:
1. The market’s on a hot streak: As the market continues its decade long bull run, more and more investors become enticed to get in on the action, afraid of missing out on the big gains since 2009. Even with October’s sell-off, the Dow Jones Industrial Average is up over 200% since 2009.
2. Your other options aren’t great: If you are like most Americans, you’ve generally limited your investing options to three choices: stocks, bonds and cash. Given that U.S. corporate bonds have been essentially flat since after the recession, it’s no surprise that stocks make up almost three quarters of our investments.
What many don’t realize is that alternative investments, now finally available to individual investors, can actually match or potentially beat those returns and provide important diversification. More on that later.
You may not realize how exposed you truly are to the whims of the stock market.
Ask yourself, how many of the following investment vehicles do you contribute towards? 401(K), Traditional IRA, Roth IRA, 529 college savings plan, family trust, pension, and or personal trading account? These investment vehicles are typically comprised of mostly stocks, amplifying your exposure across multiple aspects of your investment portfolio.
One traditional allocation principal we often hear about is the “100 rule”: individuals should hold a percentage of stocks equal to 100 minus their age.
We are supposed to decrease our exposure to the stock market as we get older, right? In theory, yes…
However, according to Fidelity, the average baby boomer handling investment decisions for their 401(K) holds 70% of their 401(K) in stocks. As the market continues to outperform, it has enticed many to move their nest eggs into equities.
Such blanket and highly generalized rules can be harmful for people that have any unique investing profile. But maybe it’s not the formula’s fault, given that many investors have traditionally limited themselves to only three investing options. A fourth option, alternative investments, could balance the clash between cash, stocks, and bonds, and help balance the allocation equation.
Having part of your wealth in alternative investments can help reduce your exposure to the stock market while providing potentially attractive returns.
Alternative investments typically are not impacted by swings and overall volatility in the stock market. For example, in our Marine Finance offerings, a company that transports coal and iron ore borrows money from YieldStreet to lease the ship. If the Dow Jones drop a few hundred points in a week, the borrower is still going to sail to its destination, drop off its haul and continue to make payments to YieldStreet.
Similarly, even if the market shoots up because of a new trade deal, the borrower in a Commercial Real Estate offering consisting of a portfolio of three short term bridge loans is going to continue to make interest payments to YieldStreet.
As mentioned before, the stock market has averaged roughly a 11% return per year. At YieldStreet, our investment opportunities have target returns between 8-15% and are backed by tangible collateral, which helps protect downside and mitigate risk.
We don’t believe there is a one-size fits all answer to the amount of exposure you should have to the stock market. But with target returns potentially matching the historical returns of the market, you may consider increasing your exposure to alternative investments, now that they are finally available to you.
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