f us are living in challenging times. We’ve gone from seeing a period of bullish optimism, nose diving to a bearish pessimism in the last few years. The investment climate has been uncertain, and what we’re seeing is that “buy and hold” investment models are not effective in today’s volatile economy. Instead, there has been a growing interest in alternative investment strategies that can provide opportunities not available through a stock/bond portfolio.
The New Game Plan
I believe that we’re currently in a long-term bear market and it may take several years before a long term bull market cycles returns. Until then, we most likely will see a continuation of a choppy, sideways environment similar to what we have experienced in the last decade.
Since 2008/2009, there has been a fundamental shift in the marketplace to invest for shorter time horizons. We need to recognize this shift and explore specific ways of investing on a more active basis where positions are evaluated daily, if not more frequently.
In order to produce actual cash flow from your investments in the new market economy, you could consider integrating a part of your total investment portfolio of stocks and bonds with alternative investments, so that you could protect the remaining part of your portfolio from the possibility of a downside risk.
The old ‘buy and hold’ strategy is fading out for many. It may not hold up in the new market environment. What I see is that we’ll be seeing a new model of investment allocation; moving away from the traditional 60% stock (equity)/40% bonds (fixed-income) model to a 33% stock, 33% bonds and 34% absolute returns portfolio.
This approach includes a variety of non-correlated alternative strategies such as commodities, real estate investment trusts, derivatives, and other non-traditional investments. Many hedge funds can also fit into this category, too.
One of the advantages of using these kinds of strategies for absolute returns is the very nature of diversification. It minimizes the risk in a portfolio by holding asset classes that are non-correlated, and so it reduces the exposure of individual asset risks. You can utilize these non-correlated investment strategies in order to neutralize the risks, which can be attributed to the decline in valuations, so often seen in traditional stock & bond portfolios.
But, of course, the rate of allocation does depend on several factors such as your time horizon, liquidity requirements, risk tolerance and your general investment objectives. Make sure your advisor is well versed in these new alternative strategies and can recommend money managers that have a proven track record managing these asset classes.
