2022 has been a stomach-churning year for the stock market. From a series of interest rate hikes by the Federal Reserve to rein in soaring inflation to ongoing geopolitical conflicts, a perfect storm of conditions has kept markets in a state of frequent turbulence.

Those who have allocated a large portion of their portfolios to equities–especially if those investments include their 401(k) or other retirement accounts–are more likely to experience stress during periods of market volatility. One way to alleviate that stress is to shift a portion of your equity allocation to alternative investments, which can help diversify your portfolio. 

Choppy Markets Can Affect Investors’ Mental Health
The University of Michigan’s Consumer Sentiment Index for September 2022 was at 58.6%, 19.5% lower than last September. According to Surveys of Consumers Director Joanne Hsu, recent decline in consumer confidence is due to inflation and related concerns, which includes market volatility. With U.S. stocks down 4.6% in the third quarter and 24.9% year-to-date, these feelings of anxiety are completely understandable.

Some recent academic research has also found a correlation between turbulent financial markets and heightened anxiety even when markets were on an upward trend. According to a 2019 study, volatility in either direction affects people’s sense of financial security because it creates uncertainty around expectations of income and returns. Though therapists or mental health counselors often encourage clients to avoid situations that trigger anxiety, that’s not altogether feasible with an investment portfolio for most investors.

Private Markets Can Provide Diversification—And Consistency
Rather than exiting the stock market entirely, investors should instead consider reallocating some of their equity positions to alternative investments.

Institutional investors have recognized the importance of core allocation to alternatives for years. In fact, private market investments can account for up to 50% of institutional portfolios reaching a record-high $9.8 trillion in July of 2021 at a gain of nearly 25% or $2.4 trillion from the previous year.

Moreover, CalPERS, the largest defined benefit public pension in the U.S., reported that for the 2021-2022 fiscal year, its private market investments significantly outperformed its investments in global public stocks. Private market investments tend to be less volatile and more consistent than equities, which may help investors alleviate financial stress.

Many investors who begin exploring alternative investment options can become hesitant once they learn that alts are typically less liquid than publicly traded stocks and mutual funds. But for retail investors who are investing for long-term goals like retirement, liquidity in the short term should not be a high priority to begin with.

Alternative Asset Classes To Explore
The private markets offer a wide variety of investment opportunities. Here are three alternative asset classes investors might consider incorporating in their portfolios:

Real estate
Private real estate has outperformed US equities and fixed income on an absolute and risk-adjusted basis since 2000. And even given today’s inflationary environment, private real estate can be an attractive opportunity for retail investors. Since U.S. property prices and income have historically outpaced inflation, private market real estate investments can be a potential hedge against rising consumer prices in a well-diversified portfolio.

A REIT (real estate investment trust) can provide diversified exposure to the real estate sector without the burden of a direct investment. REITs can provide access to a diversified pool of real estate investments that are almost impossible to access for the typical investor. These types of investment vehicles come with surprisingly low minimums and allow individual investors to easily invest in private commercial real estate, a practice once reserved only for the institutional investors and the ultra-wealthy.

Private credit
Private credit can generate income for investors by lending to borrowers whose needs are not met by traditional lenders. For example, smaller companies looking for shorter maturities or other bespoke lending terms can work with private lenders, who are not subject to the same regulatory requirements and can therefore, offer more flexibility than banks. Private credit can generate income for investors via regular interest payments, payments in kind that add to the balance, and a variety of other fees and deal structures.

Art
According to the Artprice100 Global Index, the art market has outperformed the S&P 500 since 2000, with returns as high as 360%. Investing in fine art not only offers exposure to potentially historic returns, but it also provides investors with the opportunity to appreciate and enjoy art. And since art typically has a low correlation with equities, it can also serve as a hedge against inflation, add diversification and potentially reduce overall portfolio volatility.

Traditionally, investors who wanted to access the art market needed connections - they had to work with a dealer, find a reputable auction house, or go to art fairs. Even after they found the proper avenue into the market, investors could rarely afford directly purchasing physical artworks.

One recent innovation has opened access to a whole new audience of investors. Through the power of fractionalized trading, newer investment platforms can offer investors access to valuable physical artworks, giving them the opportunity to invest in loans backed by artworks that generate monthly income.
Investing always involves some risk, but periods of stock market volatility can heighten feelings of stress and anxiety among investors who have significant portions of their portfolio allocated to equities. By reallocating investments to include a greater proportion of alternative assets, investors can increase their overall diversification - and gain peace of mind.

Michael Weisz is founder and president of Yieldstreet.