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The Alternative Answer

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The Alternative Answer

The Nontraditional Investments That Drive the World’s Best-Performing Portfolios

HarperBusiness,

15 min read
10 take-aways
Audio & text

What's inside?

Alternatives to stocks and bonds strengthen investment portfolios by increasing their tolerance to all types of risk.

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Editorial Rating

8

Qualities

  • Applicable

Recommendation

Investment expert Bob Rice believes that more investors should add alternative assets to their portfolios of stocks and bonds for greater long-term returns with less total risk. Mutual funds, exchange-traded funds and similar vehicles now offer exposure to long/short stock strategies, oil and gas royalties, private equity, timber and many other types of alternative investments. Such assets may not outperform stocks in the short term, but, because alternatives’ returns are uncorrelated with equity returns, they can resist depreciation when share prices fall. However, Rice cautions in this breezy and informal but instructive text, choosing wisely is critical: Alternatives managers tend to produce a wider variety of good and bad results than those who handle only equities and fixed-income assets. While not advocating any particular investment or investment strategy, getAbstract recommends this overview to individual investors looking for ideas on how to improve their portfolio performance and protect their gains from bear markets, recessions and inflation.

Summary

Alternative Assets and the Four Purposes of Investing

Long-term investments in bonds and stocks are traditional parts of portfolios. But simply betting that equities and fixed-income securities will rise in value is riskier than owning a portfolio with a variety of other assets, which ensures that at least some will perform well regardless of economic conditions. For example, in the 2008 crash, “managed futures” strategies gained over 20% on average. A well-diversified portfolio minimizes volatility, because gains and losses on unrelated investments tend to offset each other.

Avoiding huge losses in hard times is critical. In fact, “the biggest key to long-term wealth accumulation is loss avoidance.” Do the math: If an investment portfolio sheds 50% of its value, nothing less than a 100% gain will produce a full recovery. Escaping investment losses has a bigger impact on the long-term accumulation of wealth than trying to maximize investment profits.

Consider the impressive record of the Yale University endowment fund, which doubled in value in 10 years despite recession and stock market volatility. In 2012, its managers had 6% invested in equities and 50% in...

About the Author

Bob Rice is Bloomberg TV’s alternative-investments editor and the managing partner of Tangent Capital.

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