Are alternatives to stocks and bonds good for investors? I have been pondering that question for many years.
A Hot “Alternative Investment”
Back in June, I wrote about “A DIY Lesson Learned”, where I shared my experience of attempting to repair my hot water heater. After spending too much time and effort to fix it myself, I promised that I would just call a professional the next time I had a home repair need. It turns out, I didn’t have to wait long to see if I had really learned my lesson.
It all started when someone flushed a toilet while I was taking a shower. The warm shower become very cold and then scalding hot, which had never happened in the previous 12 years we have lived in our home. In my college days, a sudden change in shower temperatures was such a common occurrence in the communal dorm showers that it was expected that someone about to flush would announce their intent and wait for anyone in the shower to acknowledge they were aware of what was coming. “Crapper,” the flusher would yell! “Shoot it,” those in the shower would reply when they were clear.
"No" is Always an Alternative
Depending on who you talk with, alternative investments include, but are not limited to, different types of hedge fund and private equity strategies. Even commodities, which we allocate small portions of our Accountable Portfolios into, are considered alternative in some circles. All of these investments are often marketed as having greater return potential than traditional stocks or bonds or low correlations with other asset classes.
In recent years, “liquid alternatives” have increased in popularity considerably. This sub-category of alternatives consists of mutual funds that may start from the same building blocks as the global stock and bond market but then select, weight, and even short securities in an attempt to deliver positive returns that differ from the stock and bond markets. Are they able to do what they set out to do?