The turbulent markets and economy have left many investors wondering about everything from “why did I do that?” to “what should I do now?” Alternative asset classes quickly come to mind as the object of both of these questions.
Some investors are attracted to alternative investments by high returns, without even considering the added benefit that further diversification can lower the overall risk of the portfolio. But investors also may not understand the risks some of these individual investments can pose. Evaluating alternative investment options is a complicated process that challenges even experienced investors, and sometimes even their advisers.
Enter Larry Swedroe, principal and research director of Buckingham Asset Management, with the third in his series of “The Only Guide to…You’ll Ever Need” books for investors. His previous Only Guide titles, covering…a Winning Investment Strategy…and…a Winning Bond Strategy…join Wise Investing Made Simple and Swedroe’s other books in the libraries of many seasoned investors, financial planners and investment advisers. Bloomberg Press will release The Only Guide to Alternative Investments You’ll Ever Need, by Swedroe and co-author Jared Kizer, a former Buckingham investment adviser, Nov. 12.
Subtitled “The Good, the Flawed, the Bad, and the Ugly,” this guide offers a roadmap to the world of alternative investments. It’s a timely addition to the knowledge base for investors and advisers, with many left skittish by the market’s gyrations or needing to make up unexpected losses of the last few weeks.
‘The Way Smart Money Diversifies Risk’
The authors begin by warning that “straying from a well-conceived investment plan to have adventures with interesting investments is likely to be dangerous to your financial health.” They stress the need to first devise a solid investment plan and only then move on to investigate the risks and potential benefits of investments to carry out the plan.
Framing their book as a “travel guide” to alternative investments, Swedroe and Kizer liken the investment plan to a travel plan or itinerary. Alternative investments then become “scenic side tours” that can either be wildly successful or detour travelers to unsafe spots that only serve to make them late getting to their destination, if they arrive at all. By their nature, alternative investment vehicles are less familiar than more common ones. Swedroe and Kizer advise investors to research each one as they would a tour or vacation spot.
Even if it sounds a little hokey, buckle up and take the trip—there is plenty of good information in this book for sophisticated investors to consider. The authors make this information accessible to novices as well by explaining everything in plain language, including a long glossary that demystifies the terms used in the book, annotating their text with the sources of their research and offering a reading list for “serious investors” (even though they believe “there should be no other kind”).
Swedroe and Kizer take readers through 20 alternative investments, including U.S. and international real estate, commodities, private equity, precious metals and hedge funds, just to name a few. Subscribing to modern portfolio theory (MPT), they stack each potential investment up against criteria they explain throughout the book, such as volatility, distribution of returns, asset incompatibility, fees and expenses, liquidity and tax efficiency. Along the way, they answer questions that may or may not have already occurred to most investors, including:
- What particular risks need to be considered before investing in this type of asset?
- What historical returns are available for this asset class and what do they tell us about it?
- What is the correlation of this investment to other holdings, and what does that say about its diversification benefits in sample portfolios?
- What are the benefits to holding this asset in different kinds of accounts (known as asset location)?
- What are some specific investments in this class, and how do they compare with other possibilities?
- How does this investment affect the investor’s or adviser’s ability to plan and maintain a specific asset allocation
Good to ugly
Not surprisingly, Swedroe and Kizer consider only a few alternative asset classes “good,” but what is a surprise is that they found even fewer “ugly.” They take readers through the options for investing in the “good”—real estate, commodities, inflation-protection securities, international equities, fixed annuities and stable-value funds—not only as an asset class, but also comparing different ways of investing in that class, explaining how one or the other option might work better in a certain portfolio or account. And, they make a compelling case against the ones they consider “ugly”—equity-indexed annuities, structured products and leveraged funds.
They acknowledge that there may be a place in some portfolios for some of the “bad”—variable annuities in particular. Then they help investors figure out not only if their portfolios may have such a place, but also how to protect themselves as much as possible in making the investment. The other two investments they consider a bad bet are hedge funds and leveraged buy-outs. Perhaps the authors figured that calling them “bad” sufficed to steer folks away from these investments, and perhaps they are not as “ugly” as the other three.
For alternative investors with a little more adventure in their veins, Swedroe and Kizer take readers through eight “flawed” asset classes, including private equity, precious metals equities and emerging market bonds. The information they offer will be invaluable to investors looking for a safe way to add some of these holdings to their portfolios.
One tricky thing is that the authors frequently advise readers to consider investment vehicles that aren’t available in most retirement plans. But many of these assets are allowed in self-directed IRAs, making their benefits of diversification and a particular asset mix available to most investors.
The Only Guide to Alternative Investments You’ll Ever Need is available in hardcover directly from Bloomberg Press as well as from other online sources.