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Investments - Strategies

Your Broker Recommends Alternative Investments. Is That Okay?

September 24, 2019

by Howard Haykin



Perhaps ... first you need to know what's in your portfolio and obtain some basic information about liquid alternative investments, namely: (i) what are they? (ii) do they fit your investment profile; and, (iii) what are their downsides? 

Like many cautious investors, you'd like to see your portfolio grow steadily while it's protected from big dips in the stock market - which is why investors commonly hold a diversified mix of stocks and bonds and mutual funds. When one type of investment moves up, the other typically moves down - so your portfolio gains some cushion against wild swings in the markets.



USING PORTFOLIOS TO COVER LIVING EXPENSES.    However, things can get complicated for individuals who 'live off' their portfolios to cover living expenses - like retirees and individuals with limited earnings. Should the value of their portfolios suddenly drop significantly just when they need to withdraw funds, big losses can occur - and it can take years to recover.


In 2008, the price of stocks and bonds crashed, leaving many investors with massive losses. Those individuals who owned fixed income funds that held risky high-yield bonds (in order to throw off large amounts of interest income) suffered the most - particularly retirees who had no choice but to liquidate their holdings at their lowest price points


LIQUID ALTERNATIVE INVESTMENTS.    That's where 'liquid alternative investments' come into play. Such investments include funds that utilize ... (i) 'market neutral' strategies, where long and short positions in stocks are held; or, (ii) 'managed futures' strategies, where long and short positions in different futures are held. According to Darla Mercado, a personal finance writer for, allocating 10%-20% of a retail investor's portfolio in mutual funds that offer hedge fund-like strategies can be a good thing by providing some added diversification and reducing volatility (wild swings in the markets).


Alternative investments performed wonderfully during the 4th quarter of 2018 when stocks and bonds both fell in price. During that period, market neutral funds lost less than 1% of their values, whereas equity funds on average lost over more than 13% of their values. While

As impressive as those results were, there's a cost to holding alternative investments. For one thing, such hedged funds cost more to operate - usually between 1% and 2% per year. Second, when the stock markets rebound (as they did in the 1st quarter of 2019), these hedged funds tend to generate smaller returns. [Again, with alternative investments, you tend to experience smaller gains and losses.]



CONFUSED?  YOUR NEXT STEPS.   Before you commit to "alternative investments," be sure you're clear on whether these investments are right for you. First, get answers to the questions raised at the top of this posting. Next, seek out a friend, family member or independent adviser to ‘sound out’ the new investment strategies. 


While alternative investments may not involve rocket science, they may certainly seem to, at least to an uninitiated investor.