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NEWSLETTERS & ALERTS
Investments - Strategies
Your Broker Recommends Alternative Investments. Is That Okay?
by Howard Haykin
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 CNBC.com, 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
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.