Alternative investments: Is there wisdom in the crowd?

March 06, 2013

| MoneyRates.com Senior Financial Analyst, CFA

A survey released in February by EverBank found that more than half of individual investors are looking for alternatives to traditional U.S. stocks, bonds, and bank deposits this year. The question you have to ask yourself is: Should the emerging popularity of alternative investments make you more attracted to them, or should it scare you off?

Investor psychology is a fascinating topic. Some theorize that there is a collective wisdom in the actions of large numbers of people, while others point to how mass popularity has fed some epic investment bubbles over the years. In other words, you can look at popular opinion as a tip toward a new direction, or as a contrary indicator.

What the crowd is saying

EverBank interviewed 300 individual investors, and found that 52 percent them are looking at alternatives to traditional U.S. equities in 2013, with precious metals and international stocks being the most popular choices. Many of these investors are also looking to juice up the cash portion of their portfolios as well. With savings account interest rates mired under 1 percent, investors expressed interest in international bonds, currency trading and real estate as possible income sources.

What to make of the crowd's advice

As you decide what to make of the popular opinions expressed in a survey like this, here are some things to keep in mind:

  1. People tend to talk up their existing investments. Whether it is the man on the street or certain popular television commentators, people tend to hype things they are already invested in. It can be hard to distinguish between someone honestly sharing advice and someone pumping up the price of their investments.
  2. Complexity and mass appeal are a dangerous combination. People moving into currency trading or foreign bonds in large numbers should give you pause. The investment fundamentals and trading dynamics of these things are extremely complicated, and the more they become the subject of a popular fad, the more those details will be overlooked.
  3. Popular fads create overpricing. Speaking of popular fads, sometimes people can be attracted to a sector for the right reason, but ultimately the volume of investors flocking to that sector will drive the price up to the point where there is more risk than potential reward.
  4. Context is everything. Regardless of what the popular trend is, don't lose sight of the fact that you have unique needs and circumstances that your portfolio should be structured to address. Investments should be selected on the basis of how they serve your objectives, and not because other people like them.
  5. Keep it in proportion. A little diversification, such as adding some international equities to your U.S. stocks, can be a good thing. That doesn't mean you should make large-scale substitutions of alternatives for conventional investments. Among other things, easing gradually into new positions will reduce market timing risk.

The EverBank survey is an interesting reflection of popular investor sentiment. It shows that people are fed up with low bank rates and are concerned about the risk of U.S. stocks -- both perfectly understandable feelings. Whether you should follow these frustrated investors into alternatives, however, should depend more on your objective analysis of the growth potential and current valuation of those alternatives, and less on which way the crowd happens to be running at the moment.

MoneyRates.com has always searched interest rates to find you the best rate. Savings interest rates may be low, but that's all the more reason to shop for the best rate. Check out the top savings interest rates from Ally Bank, American Express and others.

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