Alternative Investments today refers to a myriad of items from rare collectibles to farmland. Many on Wall Street recommend different hedge funds, Reits, mortgage-backed securities, and other complex financial instruments as an alternative to the basic stock market. At various times they may present great investment returns, however, what we have found is invariably they are still tied to the overall stock market. In fact, if you compare the FTSE NAREIT Composite Index (this tracks the performance of U.S. REIT, Real Estate Investment Trusts), since 1972 the total return was 9.425% with the S&P 500 return at 7.195% with very similar peaks and valleys. Also, in a 145-year study by the financial website “Bigger Pockets.com” a clear correlation of the peaks and valleys in the stock market to the real estate market are ever present.
Alternative Investments Over the Years
For the above reason and many more that we will discuss we are limiting this discussion to alternative tangible investments. We will be discussing the classic investments of the wealthy throughout the centuries. Since the discovery of gold and silver, it has been society’s store of wealth. The first coinage in precious metal form was around 700BC from the kingdom of Lydia (located on the Mediterranean in part of modern Turkey). From that time on, it was a passion of the nobility to collect and hoard coinage of previous empires as a store of wealth from the precious metal (gold & silver) and as a collectible because of the artistry and beauty.
As with coins, gold and silver and the collecting of gemstones and jewelry date back millenniums. The ancient Greeks started the classification of stones between precious and semi-precious to ordinary or common. The Egyptians collected gems and used gold and silver in jewelry. From the times of the early Egyptians, the collecting of art and the adoration of structures and homes with art became a very significant passion for the wealthy. (As we know from the time of the Stone Age, art in its crudest form was commonplace).
By the time of the Renaissance, the collecting of art, jewelry, and coins were a fundamental past time of the nobility. At that time there were no alternative investments and these were the primary stores of wealth and this would continue to today. Since the turn of the century, the collecting of these types of objects has grown enormously. To cite two examples of a collecting passion becoming an immense fortune are the collections of John Paul Getty and Albert C. Barnes. In these cases, the collections literally became worth billions.
The ultra-wealthy have long understood the fluctuations of the real estate and stock market and have used rare coins, fine art, and fine jewelry and gems as a diversification of the paper assets and real estate holdings. The benefits of these types of assets are far beyond the simple appreciation that they produce. The diversification that they provide is well documented. Rare coins, fine art, precious metals, fine jewelry, and other alternative investments appreciate greatly in times of inflation. More importantly, when mainstream investments like the stock market collapse, they tend to hold their value.
Investments and the Stock Market
Some of these assets like gold and other precious metals tend to be counter-cyclical. As the stock market moves down, they move up. An example of a microcosm of this is the price of gold from the end of September to October in a two-week period the stock market had several corrections. Gold increased from $1,180 to nearly $1,230 or a 4% increase for a mere 14-day period that’s the equivalent of over 104% annualized.
In the past 100 years, we have had 20 major stock market crashes (corrections over 20%). In fact, gold has either held its value (at a minimum) or greatly appreciated during these stock market corrections. For example, during the 1929-1934 stock market crash the Dow fell 89%, gold increased 68%. It took until 1954 for the market to fully recover to parity. As a point of comparison from the 1929 peak to the 1952 recovery, the rare coin market appreciated 318% while stocks net gain was zero.
During the 1966-1972 bear market, stocks went down 38% while gold increased 426%.
In the 1999-2003 bear market, stocks fell 31% while gold appreciated 58%.
In the most recent 2007-2009 stock market crash stocks fell 52% in the same cycle gold skyrocketed 73%.
If we look at the long-term since 1970 stocks (DJIA) went from 1,000 to 25,000. Gold (indexed) from $1,000 to 36,000
While rare coins for the period (indexed for comparison) went from $1,000 to almost $70,000 (PCGS ultra-rarity index) or nearly 2 ½ times greater than the stock market.