Five years ago in the wake of the 2008 - 2009 financial crisis Wall Street trumpeted that the best days for stocks and bonds were over, that investors needed to include "alternative investments" to have any hope of succeeding in the future. Of course, these were the firms that were concocting funds and partnerships to sell to investors who were once again wary of stocks after the extreme market volatility they had just experienced.
Fast forward to today. We can see that the advice to abandon traditional stock and bond investing was not good advice and, was certainly mistimed as the stock market has now experienced its fourth longest bull run ever. We are more than five years into a bull market and its time that investors start to think about defense against the next bear market decline.
Don't get me wrong. I don't believe we're quite at the end of the current upward move for stocks, but we're most likely much closer to the end than the beginning. Now is the time to develop your plan for how to deal with the next poor period for stocks. There are many ways to prepare, ranging from increasing diversification across different asset types, to proactively reducing exposure to asset classes based on a systemic approach to risk control.
Even though many of the alternatives developed by Wall Street firms have not done as well as expected does not mean they are
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all without merit. First, let's explore exactly what the terms "alternatives" means in the world of investing. The widely ac
cepted definition for Alternatives is any asset that is not a traditional stock or bond investment.
I think this definition is too broad. If the goal is to diversify into alternative asset types which help buffer portfolio volatility, it means the price movement of the alternatives should tend to be different than stocks and bonds. For example, real estate investment trusts (REIT's) are considered alternatives because they are not technically common stocks. But a quick glance at the price movement of REIT's alongside a chart of the stock market for the last ten years or more will reveal that in the context of protecting your portfolio from stock market declines, investing in publicly traded REIT's is of little value.
My preferred definition of alternatives would be to include investments whose prices move without much correlation to stocks and bonds. Examples could include commodities, floating rate securities and some non-traded (illiquid) securities. These investments may have a better chance to help buffer the extreme portfolio value changes that cause investors to make decisions based on emotion rather than a long-term, plan driven basis.
I'm sure some of the funds the Wall Street firms have put together will work fine during the next correction. The difficulty is wading through the volume of alternative investment products and selecting those suitable for you.
Your financial advisor should be able to help narrow the field and help you make sure your overall plan is not too susceptible to the next stock market decline. Remember, it's not a question of "if", but "when."
Tom Breiter is the president of Breiter Capital Management, Inc., a registered investment adviser. He can be reached at (941) 778-1900 or by e-mail at: firstname.lastname@example.org