As the financial markets go through their cycles, the product creators on Wall Street pound the drum on different types of investment vehicles which are designed to solve all our problems. Unfortunately, these are usually designed to be easy to sell by brokers; which means they are most likely a strategy that would have worked great in recent years.
But, for investors, it's the next few years that are important because the past is gone in terms of investment opportunity. Needless to say I get a bit wary when the vehicles being touted are billed as a must have. Technology companies and dot.com's in 1999, the "Nifty Fifty" growth companies in the 1970's, real estate investment trusts in 2005 and commodities in 2008 all ended badly for those who came late to the game.
Today, it's hard tohave a discussion aboutinvestment planning
without the topic of "Alternative Investments" coming up. This is the new mantra from Wall Street -- a bunch of product creators with a lot of computing power designing strategies that will supposedly save our portfolios from a miserable existence.
Ask most investment professionals, and certainly most individual investors to define what an alternative investment is, and a lot of stammering is likely to ensue. It's not their fault. The term "Alternative" is very broad and can encompass a lot of potential investment strategies.
I see this as particularly dangerous for investors who are lured by the shining light of Alternative Investments, but have no idea what they are buying, or the risks that may be involved.
Some investment strategists consider anything that is not a conventional stock, bond or cash investment to be an alternative.
Under this definition some pretty standard investments that have been around for several decades would be considered alternative. For example Real Estate Investment Trusts and Master Limited Partnerships are technically not common stock, but they trade like stocks and effectively represent ownership in a business venture, which certainly sounds like an equity oriented investment to me.
In some cases commodity investments, such as precious metals, oil, lumber, and agricultural products are considered alternative investment vehicles.
Many investment funds have been formed around commodities and other asset classes using what is called a "managed futures" concept where a formula based approach to buying and selling commodities futures contracts is supposed to provide a low volatility return.
To me this is more of an alternative strategy to traditional investing techniques. U
nfortunately, these became popular after the 2008 financial crisis, but a quick review shows few that have generated positive returns over the last several years, while traditional stock and bond investments have flourished and provided great results over the last four years.
The latest trend in Alternatives appears to be creative strategies in fixed income investing to try to eke out extra income in today's very low interest rate environment where it could be argued that a 10 year Treasury bond is a riskier investment than common stocks over the next few years.
In summary, you should be wary of those who are pushing products that sound like they solve all your problems, and at the least, make sure you have an understanding of what is being done with your money to deliver the implied investment nirvana.
If you don't' understand it, then the guy selling it probably doesn't either.
Tom Breiter, the president of Breiter Capital Management, Inc., is a registered investment adviser. He can be reached at (941) 778-1900 or by e-mail at: firstname.lastname@example.org