What’s My Alternative?
You’re sitting in the dentist chair with your mouth wide open and she says, “Do you want the root canal, or should I just pull this tooth”? You’re at the restaurant and your server says, “Do you want fries or dessert with that”? How often are we faced with a choice and we don’t like either option? The first question that pops to our mind is “What’s my alternative”?
It’s the same with investing. In today’s world, in a “traditional” portfolio you have 2 choices – stocks or bonds. What if you don’t want either? Stocks are expensive based upon almost all historical measures. On top of that, you have the never-ending volatility (how’d you feel about your stock portfolio in Q4 of last year?). What about bonds? Are you crazy? Conservative government bonds pay 2% – 3%. Layer on taxes and inflation and you are losing money every year.
Is this the only choice – some muddled up 60% mix of Large-Cap, Mid-Cap, Small-Cap, US, European, Emerging Market stocks combined with 40% in bonds that pay me nothing? Please no! What’s my alternative?
Well, the smart money (think Canada Pension Plan (CPP), Ontario Teacher’s Pension, OMERS) and the big US Endowments (like Yale & Harvard) have all found one. Take a close look at their portfolios. No 60/40 mix of stocks and bonds. No sir.
Take a look at CPP as an example. They publish their asset mix online. They are currently 38% Stocks and less than 10% Bonds. So, what’s the other 50%+ invested in? Private Equity, Real Estate, Absolute Return Strategies, Infrastructure, Credit Investments and other Real Assets. What are these? These are your Alternatives.
Alternatives are, very simply, any strategy that is not a “traditional” stock or bond. Once the domain of only the uberwealthy and sophisticated institutional investors like the aforementioned pensions, they are now available to almost all investors if you know where to look.
The simplest alternative to understand is Real Estate. We are all familiar with the concept of rental real estate. You know, you buy your neighbour’s house and rent it out. Just think on a bigger scale. You invest in a pool or fund that buys apartment buildings or commercial office buildings and manages them and rents them out on behalf of all the investors. They take a fee for doing so but in exchange we don’t have the hassle or maintenance responsibility of managing the building and tenants.
What about Credit Investments? Think privately negotiated mortgages or loans. Again, you invest in a pool of these with a professional manager responsible for the underwriting and servicing of the loans and we collect the ongoing interest income.
What do these have in common? They don’t require the stock market to go up for us to make money. They are not without risk, but if they are well managed by responsible experts, they will provide us a steady return totally independent of the market. Now that’s an Alternative I am interested in!