Earlier CNBC had John Duffy from JP Morgan on who among other things made the point that if you missed the best five days of this year you missed out on 12% of upside. This bit of logic comes up every so often and I think it is wildly flawed.
Forgetting about predicting anything for the moment if the market peaks on a certain day then drops 28% (normal bear market decline) over the following 12 months (within the range of normal bear market duration) then the most important thing would be being completely out even if along the way in that 12 month 28% decline there were four different days where the market was up more than 5%.
These sorts of best days worst days commentaries come along every so often but they make too many assumption and leave out too many details. If you are one to try to make defensive allocations when you think the market will struggle you should remember that there will be feel good rallies along the way.
Duffy did have one interesting thing to say about a general target allocation they use for clients which is 40% equities, 35% cash and fixed income and 25% alternative assets. This fits in line with some of the posts here of late.
What do you think of the 25% into alternative assets? What would you include in alternative assets? What would you like to see that does not already exist in the way of accessible alternative assets?
Wikinvest Wire
9 comments:
Roger,
I would like to suggest you use a better descriptor then alternative asset. I know you can not control everyone else like the gentleman you quoted.
But what you say gets misinterpreted or changed by readers frequently by my guess. When you start with a term like alternative asset or absolute return it just seems so meaningless to me.
a fair criticism, what would you suggest?
I would also note that no matter what any write says someone will misconstrue or add 1+1 and get 11.
What are the characteristics of an alternative asset? It must mean something more than not stocks/bonds/real estate.
Great questions Roger,
Here's one definition:
http://www.investopedia.com/terms/a/alternativeassets.asp
Though I doubt many of us would seriously consider stamps, trading cards, rare wines, etc. for a 25% allocation. Hedge funds which actively trade equities, are these really alternative assets? Commodities, gold, currencies, and real estate would all qualify. How about green or sustainable efforts such as maintaining and restoring natural habitat? Not sure how this would be packaged, but there's likely a vehicle.
Also interesting to note, the investopedia definition states that ".......alternative assets tend to be less liquid than traditional investments. Thus, investors who favor alternative assets will have to consider a very long investment horizon."
As ETF's seeking to replicate these alternatives become more readily available, how will they perform relative to the underlying assets, and will they in fact change the performance characteristics of the assets or markets?
The current commodities boom, as a case in point.
I'm open to the idea of alternative assets for diversification/volatility management, yet am hesitant to dive into such ETF products until there's more of a track record.
The trouble with trading cards is that the fine print would have to address the risk of mothers who clean the attic after you leave home.
I have 15% hedge funds (including listed hedge funds (in Aus), long-short mutual funds, managed futures), 5% private equity (listed), 5% real estate (through funds, listed). I have 10% in bonds and rested in leveraged stocks to get a stock market beta greater than one. In my Mom's portfolio we have 18% currently in alternatives:
Permal Investment Holdings
A&Q Hedge Funds (UBS internal)
Man/AHL
UBS Agribusiness Certificate
Well, none of that is accessible to the average American investor. Equities 32% and bonds 28%, cash 16% (owner occupied apartment is the remainder). I'm trying to get the bonds percentage down.
Wine, baseball card, gold?????
You wonder why I hate nebulous terms like alternative investments?
At least some of it simply sounds like crap to me.
Alternative would depend on your budget. Stocks, bonds, ETFs and commodities can all be bought on restricted budgets. An alternative could be a rare coin, vinyl record or car for example. Personally, if Batman's suit was available for a few thousand dollars it would be a great investment.
Why not just put your money into one of the new Vanguard Managed Payout Funds? Use the growth fund, reinvest the payout ( which is minimal ), and you have access to alternative assets managed by professionals for a very low fee. No need to rush in since they are just starting, wait for a little track record and their new hedge fund to start.
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