Alternative Investments, Do You Really Need Them?
Alternative investments are generally used by investors to diversify their investments beyond the typical asset classes of stocks, bonds, and cash. Alternative investments are usually private equity funds, private REITs, private real estate funds, hedge funds, or venture capital funds. The hope of diversifying with these alternative assets is to reduce volatility and increase your return potential to the greatest extent possible. The traditional way of limiting volatility in your portfolio is to combine equities, bonds, and cash in a specific allocation to get the desired result. Unfortunately, bonds have not been providing the type of income that investors expect and as a result investors have been in search of alternative investments.
As an investor, do you really need to seek alternative investments for the purpose of reducing volatility and increasing your returns? We do not think so and would suggest that investors focus on developing equity strategies that are higher performing with lower risk profiles than the overall market. Fundamentally sound strategies grounded in common-sense principles would do the trick for most investors. If you want more stability in your equity portfolio, then you could as an example focus on a strategy that includes larger stocks that have S&P 500 membership. After developing a strategy that suits your needs, combine it with a basic long-term corporate bond fund or other bond fund of your choosing. This clean and simple approach would be more than adequate for meeting your needs.
Of course, at Investoristics, we have developed an S&P 500 approach that would work for most investors seeking a simple solution to their problem. Our solution has outperformed the S&P 500 15 out of the last 18 years ending on 12/31/2021 with an average return over 20%. The average market capitalization of the stocks used in this approach is about $230 billion which would be sufficient for retail as well as institutional investors. Also, the strategy has a higher Sharpe Ratio than the S&P 500 over the 18-year investment period and is easy to implement. The strategy did very well relative to the market in the first quarter of 2022 posting a return over 9% which was well above the S&P 500 which ended the quarter in negative territory. Why bother with complicated investment vehicles that come with potential drawbacks such as, long lock-up periods, lack of liquidity, or require accreditation? If accreditation (minimum income or net worth requirement) is necessary, your typical retail investor would not be able to invest in alternatives like hedge funds or private equity.
If it is stability that you seek, why not combine our S&P 500 approach with a long-term corporate bond fund. Over the last 18 years a 50/50 allocation using our approach would have returned 15.42%. Over the same period, a 100% allocation to the S&P 500 would have only returned 10.62%. That is not a mistake, it just reflects the power of using a superior equity strategy rather than seeking a more complicated solution.
Study the fundamental investment strategies that have already been proven to work and make them better and specific to your needs. Whether you are an institutional or individual investor, the same “keep it simple’ approach applies. If you do not have the time or would like to discuss further, please feel free to contact us at your earliest convenience.
