When investment markets have difficult years like 2022, ideas about finding alternative investments that behave differently in down markets are written. Typically, there is a specific economic factor that these ideas solve for, and over the past year, that factor has been inflation. Many pundits had ideas about how to position your portfolio for rising inflation, so let’s see how they turned out!
Some of the most common ideas for alternative investing dating back to the beginning of 2022 were:
- Gold/Precious Metals – Gold and other precious metals are popular in times of turmoil. They are often seen as an alternative to cash and bonds. Gold performed well relative to the market in 2022, only losing 0.5%. The catch is that the return came with much more volatility. Long-term, gold tends to average the same return as bonds, but with stock market volatility, it is a challenging alternative to cash or bonds.
- Treasury Inflation-Protected Securities (TIPS) – Late in 2021 and early in 2022, investors flocked to TIPS, anticipating inflation increases. The lesson learned from this trend is that TIPS are still bonds, meaning their prices drop when interest rates increase. Since TIPS tend to be longer duration in nature, this led to a significant down year in 2022, despite their inflation-hedging mandate. Overall, the broader bond market outperformed TIPS in 2022. TIPS may be a sensible part of an overall asset allocation but were not the ‘magical investment’ many wanted.
- Cryptocurrencies – Also looked to as an alternative to cash. You probably already know about the very difficult year crypto had in 2022. Despite the rebound this year, crypto has not been a hedge against inflation or against the dollar as many hoped. Extreme volatility also makes it difficult for the average investor to hold onto, especially in down markets.
Overall, these trendy picks offered mixed results for investors. The lesson here is that the stock market and the economy are multi-factor mechanisms. Many, many different factors affect the market’s good and bad. Investing based on one factor (inflation in this case) ignores the many other inputs that affect the broader economy. This is why we believe in strategic asset allocation for our portfolios. It still allows tilts and weightings to account for current data but does not abandon diversification. Historically, diversification has been an investor’s most effective defense against market uncertainty.
What trendy investments have you considered or put your money into, and how have they turned out?
