5 Reasons Why You’re Missing the Boat if You Don’t Consider Alternative Investments – Part 1
If you’re satisfied with the performance of your investment portfolio right now and feel confident that what you’re doing will equate to meeting your future financial needs then there is no reason to read any more of this article past this sentence.
Unless you’re willing to seriously examine whether you are utilizing your assets in an optimal manner and make a pledge to change if you are not satisfied, then this article will likely cause little more than a fit of excuse-making. Besides, if you ask your MBA professor, Financial Adviser, or Stock Broker about Alternative Investments, they’ll probably respond with the same skepticism that a parent gives when their teenage son says he’s starting his own business. The irony of course being that they will do so while being 55-60 years old and still working 40-50 hours a week.
On the other hand, if you’re an individual that objectively listens to new ideas to see if they fit your needs, then makes a decision and lives with it, this article may hold some useful information.
Let me be clear, alternative investments and strategies are not the Holy Grail, but can be a piece of the puzzle. Like everything in life, research and patience are needed to make a good decision, but sometimes a little information can be the key to the start of very profitable decisions and relationships.
Reason #1 – Properly Aligned Incentives
At the end of the day, does anything else mean more to an investor than seeing his assets grow while taking into account the risk to achieve that growth? Then why are those making recommendations or actively managing your money not paid based on performance? When all is said and done, what direct monetary incentive does your mutual fund manager, stock broker, or financial adviser have to see you make 15-25% per year?
If the answer is “none”, then I wouldn’t expect to consistently make 15-25%, or even 10% per year. On the other hand, most alternative investment managers, if not all, are primarily paid through incentive fees that involve them being paid ONLY WHEN YOU MAKE MONEY. It’s true that many charge nominal management fees on a monthly basis, but these are generally negotiable, particularly if you have a larger sum to invest. Even better, in some cases, these fees are investment expenses and may be tax deductible (please consult a tax professional to determine if this applies for you).
With the compensation structure being what is in the investment community, it’s not surprising at all that most individual investors realize a sub par return, when you think about it. If an adviser is being paid on assets under management only, why would he/she take the risk to grow your money beyond what is seen as the norm?
By doing something outside the norm, they are far more likely to lose your business. As long as they can brainwash you into thinking 5% is good, they can go on taking in management fees, and you’ll be happy thinking you’re getting a good risk/reward tradeoff.
However, alternative investment managers, such as managed futures, are paid to balance the line between risk and reward, giving them an incentive to grow your returns at a higher rate without risking so much to lose your business.
The bottom line is that humans act according to what is in their best interest, so if your investment manager’s best interests do not line up exactly with yours, don’t expect to be satisfied with the outcome.
Reason #2 – Selection/Flexibility
One of the real great benefits to an alternative investment such as managed futures is that depending on your asset level, you can utilize a wide range of investment strategies that can complement or completely offset each other.
There are strategies that trade in only one segment such as Metals (i.e. Gold, Silver, Copper) or strategies that trade in every liquid market in the world in everything from US Bonds to London Coffee. While some charge redemption fees for quickly pulling your investment, many do not, giving you the ability to shop around for the strategy or mix of strategies that best fits what you’re looking for.
From a tax standpoint, you can utilize traditional tools meant to give tax protection such as IRA’s (including Roth IRA’s) and 401(k)’s. In addition, you can simply make cash investments and pay your capital gains each year out of the investment, if you want to have the flexibility to use your gains on an annual or semiannual basis without paying a penalty at the time of withdrawal.
It is generally best to protect at least a portion of your profits from taxation for the long-term and to stay as diversified as possible to guard against sudden, adverse market movements, but the point of this item is to outline that the sky is the limit on optimally building an alternative investment portfolio to fit your needs.
Reason #3 – Diversification
Of all the many reasons to be looking at other assets, in addition to stocks and bonds, there may be no greater reason than the ability to diversify. It is plainly apparent to anyone paying attention that stocks have not performed well in the last 6 months as the S&P 500 Index ($SPX) is down currently around 7% with the bottom of the downtrend thus far being approximately down 10%.
The good news is that stocks have trended up substantially over the last 100 years. However, the question is can you afford the kind of correction we have seen in the NASDAQ ($NASX) since 2000, for example, if you are nearing retirement?
Fortunately, there are alternative investments that are readily accessible that have returned 40-50% in the last 6 months while traditional assets like stocks and real estate have suffered.
Now obviously, alternative investments are not immune to down periods, and like Amaranth and Long-Term Capital Management, have the ability to ‘blow-up’. However, the key is that many of these assets are non-correlated to traditional assets and thus allow you to weather down periods in one sector of your portfolio with gains in another. If you can find a suitable mix of traditional and alternative investments for yourself, then you are well ahead of the game.
Hopefully to this point you are beginning to see the benefits to alternative investments either as an addition to your portfolio or as a stand-alone investment. In the second installment we will take a look at the benefits of increased transparency and possibly the most attractive benefit to alternative investments; performance!
Brandon Langley is the co-founder of Robinson-Langley Capital Management, LLC. Robinson-Langley Capital Management currently offers the RL Capital Managed Account Program which manages funds for individuals and institutions. You can find out more about RL Capital at www.rlcap.com. Langley can also be contacted via email at Brandon.Langley@rlcap.com.