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Are alternatives a lot less alternative?

Chances are if you have been investing for any amount of time you have learned that a proper asset allocation has a percentage of Bonds and a percentage of stocks.  It may also include something loosely called Alternatives.  When people hear the words “Alternative Investments”, they have a knee jerk reaction based on a dated idea of what they entail.  You may think of the commercials on Satellite radio or late night TV promoting metals or owning your own gas well and think to yourself, “No thanks”.  Recent research shows that by doing so you may be selling yourself and your portfolio short.

The 2013 NACUBO-Commonfund Study of Endowments found when they gathered info from 835 US colleges and Universities that many of these stalwarts of investment conservatism were heavily invested in Alternatives.  With an average return of 11.7% in 2013 no one would accuse them of being overly aggressive as the S&P surged well over 32% in the same time frame.  It would be interesting to note that in 2008 the same study indicated a loss of 25% on average also significantly different than the -34% return of the S&P 500.  It was followed in 2009 with a return of 24% versus the S&P of 28%.

It may surprise you to know, the one major difference besides the amount of money, between an endowment and your investments, is its use of alternatives.  The report shows Endowments on average have 51% of their investable assets in Alternatives.  This is a far cry from the 5% (maybe) you may have.  A recent report by Mainstay Capital also shows High net Worth investors are increasingly raising their exposure to Alternatives as well; to almost 22% and of those surveyed, 26% of those saw that number most likely rising in the near future.

So when we look at this data there are two things to consider. First we need to realize that no 2 investors are the same and you should never invest like someone else unless it is appropriate for you and your situation.  Doing something you read about in an article without making sure it fits your situation would be akin to purchasing the sports car your single friend has when you have 4 kids at home under the age of 5.  It could be disastrous.

Secondly we need to look at what our ultimate objectives are.  In this day of 24 hour news we have become indoctrinated on return, but lessening volatility should be just as much of a concern.  In the last 41 years the endowments studied have had back to back losing years only twice, in 2000-2001 and 2008-2009.  If you remove the fact that they operate on a fiscal calendar and thus are June-June and look at them from Jan-Dec then it is only once. ONCE.

If you listen to my syndicated radio show, “The Keeping Your Money Show” you know I believe volatility can ruin your portfolio.  Its effects can be devastating especially if you retire at the wrong time or need to make withdrawals during a significant downturn.  Could lessening the volatility of your portfolio be worth giving up some return?  That may remain to be seen but in many instances for many people, maybe even you; it may make a lot of sense.  

So should you move half of your money in to Alternatives?  Most likely that would not be a good option for you.  In many instances your state regulatory agencies may not even let you.  What you should do is continue being opened minded to the conversation.  While you may not have 300 years like an endowment at a university you probably have a lot more years left than you are planning for.  Alternatives just may be the key to making sure you have some money left when you get there.

"Investing in alternative investments may not be suitable for all investors and involve special risks such as risk associated with leveraging the investment, potential adverse market forces, regulatory changes, potentially illiquidity. There is no assurance that the investment objective will be attained. Please see your financial professional prior to investing." 


Jaime Westenbarger


Forest Hills Financial Inc.