An alternative investment is one that has outperformed, is outperforming and you fear will continue to outperform something you now own. Currently popular alternative investments include foreign investments and “stuff” — assets ranging from real estate to those under the ground or beneath the sea — all of which have outperformed financial assets in recent years. Although these alternatives currently sail under the flag of diversification, their appeal may in fact owe more to greed and fear.
Traumatized by recent experience with inflation, the many investors seeking alternatives to bonds are ignoring Bill Sharpe’s advice: “It seems unlikely that bonds are bad long-term investments. Below-average bond returns are more likely to be followed by above-average returns … Bonds may be priced to reflect their relative resistance to deep recessions and depressions and thus pale in comparison to stocks over any period, no matter how long, in which such events do not occur.”
Bonds are today’s friendless securities, just as small companies were five years ago. It may seem unlikely now, but a real business setback could return bonds to respectability.