How illiquid alternative investments can help you handle the volatility of the market
After a decade of the stock market basically going straight up, and the possibility that unlike the last decade the market might not rocket right back from a dip, reality is starting to set in for a lot of people. They are not going to make the money to pay for the new car or their kid’s college starting next year with that cool technology stock. Long term may actually be back to being measured in years and decades, and not new models of a smartphone.
Q4 2019 hedge fund letters, conferences and more
Electron Capital returned 3.1% for October, bringing its year-to-date return to 8.3%. The MSCI ACWI gained 6% for October, raising its year-to-date return to -22.3%, while the S&P 500 returned 8% in October for a year-to-date loss of 18.8%. The MSCI World Utilities Index was up 2.7% for October but remains down 13.5% year to Read More
The Ups And Downs Of The Stock Market
It is a tough lesson for some to learn. Money may not be there for people’s real needs that are coming up. That is, unless you had a strategy that understands that the stock market doesn’t always go up. That the market can go a decade and actually not make any money. It can have periods where it goes down, and goes down so much your stomach is churning, you’re not sleeping, and you can’t look your kids or spouse in the face.
So how do you turn the gut wrenching into a positive?
First, you need to understand that this can and will happen.
Second, you diversify. That doesn’t mean small caps along with large caps, international and a smattering of bonds.
The Positives Of Illiquid Alternative Investments
For my firm, it means using our take on the Endowment Model. You build a portfolio predominantly with investments outside the stock and bond markets, embrace the positives of limited or illiquid alternative investments. You create regular income that constantly builds up your cash position until the markets create opportunities to deploy that money; in equities that when stocks are down. And then you understand that you will hold those stocks for years, if not decades.
It is much easier to hold equities psychologically when those equities are only a third or less of your total portfolio. Then, when the stock market is down 15%, you are only down 5%. Then you are buying, not selling, because that money is not going to be used for a long time. And that is how you turn your stomach from churning to hungry in times like this.
Please note that there are special rules & risks associated with alternative investments & not every investor will be eligible or suitable to invest in alternative investments. Many alternative investments place limitations on who may purchase them based on a person's income & assets & some may only be available to accredited investors. Alternative Investments often include a high degree of risk.
Larry Steinberg is a financial adviser with Financial Architects in Pasadena, CA. He is a registered representative of Cabin Securities, member FINRA and SIPC and an Investment Advisory Representative of Claraphi Advisory Network, LLC, (“Claraphi”) an SEC Registered Investment Advisor. Claraphi is not affiliated with Financial Architects or Cabin Securities.