BAYONNE, NJ – Jan 04, 2016 – Safety, protection, insurance, all of the above – whatever you call it, investors understand the need for shelter from the market storm. The problem, of course, is where to find it, especially now.
Bonds are traditional safe havens that provide lower risk in times of turmoil, yet they offer little help in the current market environment, as interest rate risk, or the seemingly ever-present possibility that the Federal Reserve will raise rates, makes for a scary proposition.
If that wasn’t enough, add correlation to the mix, and the fact that it’s increasing. Correlation is simply a measure of how securities (in this case stocks and bonds) move in relation to one another. In recent years, they’ve increasingly moved in tandem, which means the balance that bonds once provided to protect against loss has significantly diminished. Everyone from research firm Morningstar to The Wall Street Journal has noted the lower returns bonds provide that, when adjusted for risk, occur as a result.
While it might seem all but hopeless, one solution is to invest in assets that aren’t correlated with stocks and bonds, which are unsurprisingly known as non-correlated asset classes. Also called alternative investments, these instruments move independently of the securities markets, offering a potential counterbalance of protection during heightened volatility.
Alternative investment pioneer David Swensen has come about as close as anyone to perfecting the strategy. As Yale University’s chief investment officer, Swenson oversees its $22 billion endowment (hence yet another name, “the endowment model”) as well as several hundreds of millions of dollars of other investment funds. The university reports that under his 28-year stewardship, its endowment generated returns of 13.8 percent year, a record that it rightly notes is unequalled among professional investors.
Once reserved for large institutions and ultra-high-net worth, qualified investors, alternative investments have come down-market in recent years, and are increasingly available to retail investors. Illiquid alternative investments include things like hedge funds, and are still primarily the domain of the former due to generally high minimum investment requirements and defined investment timelines. However, the rise of liquid investments, such as alternative mutual funds, managed futures and others, have democratized the space, giving investors one more weapon in the fight for protection and returns.
Word is getting out. According to PricewaterhouseCoopers, between now and 2020, global alternative assets are expected to grow to $15.3 trillion (that’s trillion with a T). That’s up from $7.9 trillion in 2013, almost doubling in as little as seven years.
Part of the reason is greater interest and utilization from financial advisors, who incorporate a percentage of alternative investments into the investor’s overall portfolio.
“The No. 1 concern for individuals in retirement is generating cash flow and income from their investments,” says Vincent Virga, president of PFS Wealth Management Group in Bayonne, New Jersey and author of The S.M.A.R.T. Approach: A 5-Step Process to Life, Leadership and Investing. “We’re able to do that without the volatility of the market by utilizing two alternative asset classes.”
These two alternative asset classes, business development companies (BDCs) and real estate investment trusts (REITs), not only provide protection, but solid returns to boot. Business development companies are a type of investment that provides financing to small and medium-sized businesses. REITs provide investors with a liquid investment in real estate.
“If the REIT invests in say, a five-unit apartment building, it doesn’t matter if the stock market goes up or down, because cash flow is still generated for the investor through rents,” Virga adds.
Debates rage about the appropriate amount to include in an investment portfolio, with some advisors advocating for as low as 5 percent of the total and others as high 30 percent and even 40 percent. It ultimately depends on the individual, their particular situation and their risk tolerance. Regardless, the complexity of alternative investments means professional advice is highly recommended. The sheer size of the alternative investment market, combined with its success in mitigating risk while enhancing return, make it well worth a look.
“It’s a moral imperative to guide clients through to an affordable quality of life in retirement,” Virga concludes. “Innovative strategies that include alternative investments like BDCs and REITs are an incredibly effective way to do it.”
For more information about us, please visit http://www.pfswealthgroup.com
Company Name: PFS Wealth Management Group
Contact Person: Vincent Virga, President
Phone: (888) 331-2821
Country: United States