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
What the crowd is saying
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
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:
People tend to talk up their existing
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
Complexity and mass appeal are a dangerous
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.
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.
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.
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.