Homepage / Investment / How to decide whether nontraditional investing makes sense for you
Amazon says this Prime Day was its biggest shopping event ever Kudlow says President Trump is 'so dissatisfied' with China trade talks that he is keeping the pressure on As stocks regain their footing, an ominous warning looms Goldman Sachs downgrades Clorox to sell, says valuation is 'unsustainably high' How Satya Nadella has spurred a tripling of Microsoft's stock price in just over four years Kudlow says economic growth could top 4% for 'a quarter or two,' more tax cuts could be coming The one chart that explains Netflix’s stunning comeback US housing starts plunge 12% in June to a nine-month low Aerospace titans Boeing and Airbus top $110 billion in orders at Farnborough Target uses Prime Day to its advantage, logging its 'biggest online shopping day' so far this year Billionaire Marc Lasry sees bitcoin reaching up to $40,000 as it becomes more mainstream and easier to trade These are the 10 US airports where you're most likely to be hacked Amazon shares slightly higher as investors await Prime Day results Wreck of Russian warship found, believed to hold gold worth $130 billion A bullish ‘phenomenon’ in bond market is weeks away from fading, top credit strategist says Stocks making the biggest moves premarket: MS, GOOGL, TXN, UAL, NFLX & more Twitter shares up 50% since late April means most upside priced in, analyst says in downgrade EU fines Google $5 billion over Android antitrust abuse Mortgage applications fall 2.5% as buyers struggle to find affordable homes America may not have the tools to counter the next financial crisis, warn Bernanke, Geithner and Paulson Investors are getting spooked as the risk of a no-deal Brexit rises EU expected to fine Google $5 billion over Android antitrust abuse Ex-FBI chief James Comey urges Americans to vote for Democrats in midterm elections Elon Musk apologizes to British cave diver following baseless 'pedo guy' claim Disney, Comcast and Fox: All you need to know about one of the biggest media battles ever Xiaomi shares notch new high after Hong Kong, mainland China stock exchanges reach agreement The trade war is complicating China's efforts to fix its economy European markets set for a strong open amid earnings; Google in focus Hedge fund billionaire Einhorn places sixth in major poker tournament The biggest spender of political ads on Facebook? President Trump Asian stocks poised to gain after Fed's Powell gives upbeat comments; dollar firmer Stocks are setting up to break to new highs Not all FAANG stocks are created equal EU ruling may be too little, too late to stop Google's mobile dominance Cramer explains how Netflix's stock managed to taper its drop after disappointing on earnings Airbnb condemns New York City's 'bellhop politics,' threatens legal retaliation Amazon sellers say they were unfairly suspended right before Prime Day, and now have two bad choices Investor explains why 'duller' tech stocks can have better returns than 'high-flying' tech names Elon Musk is 'thin-skinned and short-tempered,' says tech VC Texas Instruments CEO Brian Crutcher resigns for violating code of conduct Google Cloud Platform fixes issues that took down Spotify, Snapchat and other popular sites Uber exec: We want to become the 'one stop' transportation app 'What a dumb hearing,' says Democrat as Congress grills tech companies on conservative bias Amazon shares rebound, report says Prime Day sales jumped 89 percent in first 12 hours of the event How to put your medical history on your iPhone in less than 5 minutes Investment chief: Watch these two big events in 2018 Even with Netflix slowing, the market rally is likely not over Cramer: Netflix subscriber weakness debunks the 'sky's the limit' theory on the stock Netflix is looking at watch time as a new area of growth, but the competition is stiff Why Nobel laureate Richard Thaler follows Warren Buffett's advice to avoid bitcoin Rolls-Royce is developing tiny 'cockroach' robots to crawl in and fix airplane engines After Netflix plunge, Wall Street analysts forecast just tame returns ahead for the once high-flying FANG group Roku shares rise after analyst raises streaming video company's price target due to customer growth China is investing 9 times more into Europe than into North America, report reveals Amazon says US Prime Day sales 'so far bigger than ever' as glitch is resolved Netflix is on pace for its worst day in two years US lumber producers see huge opportunity, rush to expand San Francisco to consider tax on companies to help homeless Homebuilder sentiment, still high, stalls as tariffs, labor and land drive up costs Powell backs more rate hikes as economy growing 'considerably stronger' Netflix history is filled with big stock declines – like today – followed by bigger rebounds Intel shares get downgraded by Evercore ISI due to rising competition from Nvidia, AMD Petco aims to reinvent the pet store with something you can't buy online Genetic testing is coming of age, but for consumers it's buyer beware Tech 'FAANG' was the most-crowded trade in the world heading into the Netflix implosion, survey shows Netflix weak subscriber growth may indicate a 'maturity wall' that could whack the stock even more: Analyst This chart may be predicting the bull market's demise Wall Street says Netflix's stock plunge is a ‘compelling’ buying opportunity because the streaming giant ‘never misses twice’ Tesla sinks after Musk tweets, again Boeing announces new division devoted to flying taxis Stocks making the biggest move premarket: NFLX, UNH, GS, AMZN, WMT & more Deutsche Bank downgrades Netflix, but says big subscriber miss is not 'thesis changing' IBM is experimenting with a cryptocurrency that’s pegged to the US dollar North Korea and Zimbabwe: A friendship explained Virgin Galactic spinoff Orbit to launch rockets from the UK with space deal Artificial intelligence will create more jobs than it destroys? That’s what PwC says ‘Treasonous’ Trump and ‘Putin’s poodle:' Scathing headlines follow the Trump-Putin summit China’s fintech companies offer ‘enormous’ opportunity, investment manager says Trump's performance at summit with Putin was 'unprecedented,' experts say Walmart and Microsoft link up on cloud technology as they both battle Amazon European stocks seen mixed amid earnings; Fed’s Powell to address Congress How I knew I should quit my day job and run my start-up full-time: Viral website founder China's stocks have been trounced, but the trade war may ultimately be good news for those shares Billionaire tech investor Peter Thiel bets on crypto start-up Block.one Asian shares subdued open after mixed close on Wall Street; energy stocks under pressure Amazon cloud hits snags after Amazon Prime Day downtime Netflix isn't doomed by one quarter unless people start questioning the long-term investor thesis Tech stocks set to sink on Tuesday after rough evening for ‘FANG’ Netflix plummets after missing big on subscriber growth This wristband lets humans control machines with their minds The U.S. has a rocky history convincing Russia to extradite computer criminals Amazon suffers glitches at the start of Prime Day Jeff Bezos is now the richest man in modern history 'The United States has been foolish': Read Trump and Putin's full exchange Goldman Sachs recommends these 5 highly profitable companies — including Nvidia — to combat rising inflation Goldman Sachs releases 'tactical' stock picks for this earnings season Three red flags for Netflix ahead of its earnings report The bond market may be raising recession fears, but don't expect one anytime soon Cramer: Banks are 'making fortunes' but are still as hated as they were during the financial crisis Putin told Trump at summit: Russia never meddled in US election

Investment

How to decide whether nontraditional investing makes sense for you

When the stock market soars to new altitudes, as it has this autumn, there’s usually uneasiness among many investors about a potential drop or correction, promoting concerns about portfolio volatility.

The age-old diversification strategy of reducing risk by moving more into bonds won’t work so well in a rising interest rate environment, as this may increase risk rather than decrease it. So, many are looking for other means of diversification. Increasingly, they’re considering alternative investments — broadly defined, anything other than stocks or bonds. The goal of owning “alts” is to add to portfolios risk/reward potential that’s not correlated with the movements of stocks or bonds, aka traditional investments.

Access to many alternative investing options is readily available through various exchange-traded funds, including those owning commodities, currencies, managed futures and real estate investment trusts. But this easy access can get you into trouble if you don’t take the time to learn about the unique risks an alt may carry. Understanding some alts and their risks may require more homework than most individual investors are willing to take on.

This might apply to commodities, which can be downright esoteric. For example, agricultural commodity investing involves understanding how yields of particular crops may be affected by changes in seasonal weather patterns. And how much time are you willing to invest in studying supply/demand for rail cars?

In the run-up to the financial crisis of 2008, complexity didn’t seem to bother a lot of (or enough) investors who bought the granddaddy of indecipherable alts — derivatives. Yet there’s as much complexity in many alts that are far less abstract than derivatives. Just because a commodity is concrete doesn’t mean it’s not complicated.

More from Smart Investing:
Bitcoin too risky for “serious” investing, say advisors
Millennials lack confidence to invest: Bank executive
What investors should do before market gets gored

REITs can be counted among the more accessible alts, and they can deliver good returns while diversifying risk. Yet investors must be mindful of the differences between various real estate markets. For example, residential REITs recently have been doing quite well, driven by demand that’s still somewhat pent up from the market doldrums of the financial crisis of 2008.

But some commercial REITs, such as those that depend on mall rents, are another story now that online retailing is bruising many bricks-and-mortar chains. Instead of places where people walk around to shop, think warehouse space/fulfillment centers for online retailers and server space for the rapidly growing cloud storage industry.

Regardless of the category, alt investing can be costly, and the high fees sometimes involved can significantly reduce your net returns. A recent study by the Boston Consulting Group found that, at the end of 2016, alts made up about 15 percent of global assets under management but accounted for 42 percent of the fee revenue generated by asset management firms offering alts.

Yet fees involved are easy enough to determine in advance. The most difficult thing about alts is understanding the peculiarities of different specific alt markets. To understand the risk levels of myriad alts, individual investors must approach this unfamiliar terrain with the right mentality.

To keep the new allure of alts from causing you to crash your portfolio on the rocks of poor choices — or, in the case of minimal investment, allowing it to be whittled down — consider these basic questions:

  • Is the alt you’re considering truly and consistently not correlated with stocks or bonds in terms of both risk and source(s) of return? This is essential, but keep in mind that lack of correlation isn’t a virtue in and of itself. In their quest to diversify, investors can lose sight of their primary goal: to get positive returns. Master limited partnerships may have looked good a couple years ago, when it was widely assumed that oil prices were going to rebound quickly. But when that didn’t happen, many investors lost their shirts. Instead of uncorrelated losses, you want real potential for uncorrelated gains.
  • What’s your purpose in adding a particular alt? That is, what would be its role in your portfolio? How would this investment interact with the rest of your portfolio? Instead of reflexively sprinkling in alts, develop a rationale for using each alt strategically — or don’t buy them.
  • What are the inherent risks involved in a given alt? This may only be revealed by close study — possibly too much to justify considering it.
  • How much of an alt should you add to your portfolio? If you’re an individual investor spreading your alt dollar over a few different types, the answer probably is “not much.”
  • What percentage of your total portfolio should be in alts? This depends on your overall portfolio goals, risk tolerance and time horizon.

It’s important to remember that alts aren’t the only way that the diversification-conscious can deal with the coincidence of the stock market’s being at all-time highs and the end of the 30-year bull bond market. You could maintain a sizable allocation to bonds and still protect yourself by keeping maturities short. Or you could build a bond ladder with greater allocations for the short term (a year or two out) and smaller for longer terms (five years of so). Or you could combine this adjusted bond strategy with alts.

Thus, an adjusted approach to diversification, tailored to your specific situation, might involve alternatives to alts.

— By Eric C. Jansen, founder/president and chief investment officer of AspenCross Wealth Management

Source: Investment Cnbc
How to decide whether nontraditional investing makes sense for you

Comments are closed.