Ken Himmler.com

Stocks, bonds, and cash are fundamental components of an investment portfolio. However, many other investments can be used to try to spice up returns or reduce overall portfolio risk. So-called alternative assets have become popular in recent years as a way to provide greater diversification.

What is an alternative asset?

The term "alternative asset" is highly flexible; it can mean almost anything whose investment performance is not correlated with that of stocks and bonds. It may include physical assets, such as precious metals, real estate, or commodities. In some cases, geographic regions, such as emerging global markets, are considered alternative assets. Complex or novel investing methods also qualify. For example, hedge funds use techniques that are off-limits for most mutual funds, while private equity investments rely on skill in selecting and managing specific businesses. Finally, collectibles are included because the value of your investment depends on the unique properties of a specific item as well as general interest in that type of collectible.

Each alternative asset type involves its own unique risks and may not be suitable for all investors. Because of the complexities of these various markets, you would do well to seek expert guidance if you want to include alternative assets in a portfolio.

Hedge funds

Hedge funds are private investment vehicles that manage money for institutions and wealthy individuals. They generally are organized as limited partnerships, with the fund managers as general partners and the investors as limited partners. The general partner may receive a percentage of the assets, fees based on performance, or both.

Hedge funds originally derived their name from their ability to hedge against a market downturn by selling short. Though they may invest in stocks and bonds, hedge funds are considered an alternative asset class because of their unique, proprietary investing strategies, which may include pairs trading, long-short strategies, and use of leverage and derivatives. Participation in hedge funds is typically limited to "accredited investors," who must meet SEC-mandated high levels of net worth and ongoing income (individual funds also usually require very high minimum investments).

Private equity/venture capital

Like stock shares, private equity and venture capital represent an ownership interest in one or more companies. However, unlike stocks, private equity investments are not listed or traded on a public market or exchange, and private equity firms often are involved directly with management of the businesses in which they invest.

Private equity often requires a long-term focus. Investments may take years to produce any meaningful cash flow (if indeed they ever do); many funds have 10-year time horizons. Like hedge funds, private equity also typically requires a large investment and is available only to investors who meet high SEC net worth and income requirements.

Real estate

You may make either direct or indirect investments in buildings–either commercial or residential–and/or land. Direct investment involves the purchase, improvement, and/or rental of property; indirect investments are made through an entity that invests in property, such as a real estate investment trust (REIT). Real estate not only has a relatively low correlation with the behavior of the stock market, but also is often viewed as a hedge against inflation.

Precious metals

Investors have traditionally purchased precious metals because they believe that gold, silver, and platinum provide security in times of economic and social upheaval. Gold, for instance, has historically been seen as an alternative to paper currency and therefore may help hedge against inflation and currency fluctuations. As a result, gold prices often rise when investors are worried that the dollar is losing value, though prices can fall just as quickly.

There are many ways to invest in precious metals. In addition to buying bullion or coins, you can invest in futures, shares of mining companies, sector funds, and exchange-traded funds (ETFs).

Natural resources

Direct investments in natural resources, such as timber, oil, or natural gas, can be done through limited partnerships that provide income from the resources produced. In some cases, such as timber, the resource replenishes itself; in other cases, such as oil or natural gas, it may be depleted over time. Timberland also may be converted for use as a real estate development.

Commodities and financial futures

Commodities are physical substances that are fundamental to creating other products or to commerce generally. Commodities are basically indistinguishable from one another. Examples include oil and natural gas; agricultural products such as corn, wheat, and soybeans; livestock such as cattle and hogs; and metals such as copper and zinc.

Commodities are typically traded through futures contracts, which promise delivery on a certain date at a specified price. Futures contracts also are available for financial instruments, such as a security, a stock index, or a currency. Though the futures market was created to facilitate trading among companies that produce, own, or use commodities in their businesses, futures contracts also are bought and sold as investments in themselves, and some mutual funds and ETFs are based on futures indexes.

Futures allow an investor to leverage a relatively small amount of capital. However, they are highly speculative, and that leverage also magnifies the potential loss if the market does not behave as expected.

Art, antiques, gems, and collectibles

Some investors are drawn to these because art, antiques, gems, and other collectibles may retain their value or even appreciate as inflation rises. However, those values can be unpredictable because they are affected by supply and demand, economic conditions, and the quality of an individual piece or collection.

Why invest in alternative asset classes?

Part of sound portfolio management is diversifying investments so that if one type of investment is performing poorly, another may be doing well. As previously indicated, returns on some alternative investments are based on factors unique to a specific investment. Also, the asset class as a whole may behave differently from stocks or bonds.

An alternative asset's lack of correlation with other types of investments gives it potential to increase or stabilize a portfolio's return. As a result, alternative assets can complement more traditional asset classes and provide an additional layer of diversification for money that is not part of your core portfolio, though diversification cannot guarantee a profit or ensure against a loss.

Tradeoffs you need to understand

Alternative assets can be less liquid than stock or bonds. Depending on the investment, there may be restrictions on when you can sell, and you may or may not be able to find a buyer. Performance, values, and risks may be difficult to research and assess accurately. Also, you may not be eligible for direct investment in hedge funds or private equity.

The unique properties of alternative asset classes also mean that they can involve a high degree of risk. Because some are subject to less regulation than other investments, there may be fewer constraints to prevent potential manipulation or to limit risk from highly concentrated positions in a single investment. Finally, hard assets, such as gold bullion, may involve special concerns, such as storage and insurance, while natural resources and commodities can suffer from unusual weather or natural disasters.

A financial professional can advise you on whether alternative assets have a role in your portfolio, and which types might be appropriate for you.

While REIT is an acronym for "real estate investment trusts", they aren't the same as owning real estate. Simply explained, a REIT is a company that buys, develops, manages, and sells various real estate investments. Through a REIT, participants can invest in a professionally-maintained portfolio of various real estate properties. Some REITs will specialize in certain areas of investment while others are more diversified with the properties they invest in.

A REIT qualifies as what's known as a 'pass-through' entity through which companies are able to distribute a majority of its cash flow to its investors without facing taxation at the corporate level. Certain conditions need to be met for this to happen, including the fact that it must:

- Pay at least 90% of its taxable income to its shareholders annually
- Have at least 100 shareholders
- Have at least 75% of its total assets invested in real estate properties
- Generate at least 75% of its income from rent or mortgage interest from portfolio properties

The big difference between investing in a REIT and owning real estate outright is liquidity and the fact that you won't have to individually manage the properties invested in. As with other investment options, they aren't always safe investments but they have inherently shown to be less risky over the years when compared on a grand scale to conventional stocks.

While providing investment advice as to whether or not you should invest in REITs is outside the scope of this article, it should be said that because REITs must pay out high dividends in order to enjoy the tax benefits of their status, they can produce stable returns over time.

It's important to mention that analyzing a REIT and understanding its trends requires an understanding of how depreciation and market fluctuations can impact the investment. It is highly recommended that you speak with an investment advisor before determining if REITs are a smart investment for those undergoing retirement planning.
 

In reviewing the presidents tax proposal and then the Republicans version I 

am convinced that absolutely nothing will get changed for two more years. I understand it cannot be an easy job doing what they do but it sure seems easier to spend than to cut spending. In the end the only way our economy is going to grow is to first have more jobs available. Once this accomplished then it allows more spending which increases money flow. My proposal is to have each politician tie their districts fiscal policy to their own personal income and net worth. What if each politician’s feet were held to the fire. If they overspend their budget then reduce their pay and their net worth by the same percentage. If they come in under budget then give them a bonus on their income by the profitable percentage. Right now if they are in office for four years there is no motivation to do well during that time, unless they want to get reelected. Even so they can just blame the other guy. Just an idea!

Keeping your cool can be hard to do when the market goes on one of its periodic roller-coaster rides. It’s useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are 11 ways to help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals.

1. Have a game plan
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance. If you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage.

2. Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity. And if you don’t understand why a security is in your portfolio, find out. That knowledge can be important, especially if you’re considering replacing your current holding with another investment.

3. Remember that everything’s relative
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy.
Even a diversified portfolio is no guarantee that you won’t suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn’t necessarily mean your overall portfolio is down by the same amount.

4. Tell yourself that this too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.

5. Be willing to learn from your mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weather and take advantage of the market’s ups and downs.

6. Consider playing defense
During volatile periods in the stock market, many investors reexamine their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks, and are not necessarily immune from overall market movements). Dividends also can help cushion the impact of price swings. According to Standard and Poor’s, dividend income has represented roughly one-third of the monthly total return on the S&P 500 since 1926, ranging from a high of 53% during the 1940s to a low of 14% in the 1990s, when investors focused on growth.

7. Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging.
If you’re using dollar-cost averaging–investing a specific amount regularly regardless of fluctuating price levels–you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee a profit or protect against a loss. Also, consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down.

8. Use cash to help manage your mindset
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you’ve established an appropriate asset allocation, you should have resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you’ve used leverage, a margin call. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.

9. Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.

10. Look in the rear-view mirror
If you’re investing long-term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it’s important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.

11. Take it easy
If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. You could put any new money into investments you feel are well-positioned for the future but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level, or have an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can–and probably should–happen in gradual steps. Taking gradual steps is one way to spread your risk over time as well as over a variety of asset classes.
 

Expanded rollovers from 401(k) and other employer plans to Roth IRAs now permitted.
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task.  Many investors feel it’s useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold.   Bull markets–periods in which prices as a group tend to rise–and bear markets–periods of declining prices–can lead investors to make irrational choices.  Having objective criteria for buying and selling can help you avoid emotional decision-making.

Even if you don’t want to select stocks yourself–and many people would much prefer to have a professional do the work of researching specific investments–it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.

There are generally two schools of thought about how to choose stocks that are worth investing in.  Value investors focus on buying stocks that appear to be bargains relative to the company’s intrinsic worth.  Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price.  Either approach can help you better understand just what you’re buying–and why–when you choose a stock for your portfolio.

Value investing
Value investors look for stocks with share prices that don’t fully reflect the value of the companies, and that are effectively trading at a discount to their true worth.  A stock can have a low valuation for many reasons.  The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors.  It may be having difficulty expanding. It may have fallen on hard times.  Or it may simply have been overlooked by other investors.

A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock’s fair value.  Value investing takes into account a company’s prospects, but is equally focused on whether it’s a good buy.  A stock’s price-earnings (P/E) ratio–its share price divided by its earnings per share–is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.

Value-oriented data
Here are some of the questions a value investor might ask about a company:
• What would the company be worth if all its assets were sold?
• Does the company have hidden assets the market is ignoring?
• What would the business be worth if another company acquired it?
• Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry?
• Is the company on the verge of a turnaround?

Contrarians: marching to a different drummer
A contrarian investor is perhaps the ultimate example of a value investor.  Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason.  Value investors who do their own stock research comb the company’s financial reports, looking for clues about the company’s management, operations, products, and services.

Growth investing
A growth-oriented investor looks for companies that are expanding rapidly.  Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved.  A growth investor would give more weight to increases in a stock’s sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits.  However, some growth investors are more sensitive to a stock’s valuation and look for what’s called "Growth At a Reasonable Price" (GARP).  A growth investor’s challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.

Growth-oriented data
A growth investor might ask some of these questions about a stock:
• Has the stock’s price been rising recently?
• Is the stock reaching new highs?
• Are sales and earnings per share accelerating from quarter to quarter and year to year?
• Is the volume of trading in the stock rising or falling?
• Is there a recent or impending announcement from or about the company that might generate investor interest?
• Is the industry going up as a whole?

Momentum investing: growth to the max
A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise.  Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up.  They often buy even when a stock is richly valued, assuming that the stock’s price will go even higher.  If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, and then buy more of what’s working.

The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day.  Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however.  A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.

Why understand investing styles?
Growth stocks and value stocks often alternate in popularity. One style may be favored for a while but then give way to the other.  Also, a company can be a growth stock at one point and later become a value stock.  Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data rather than stock tips or guesswork can not only assist you as you evaluate a possible purchase; it also can help you know when to sell because your reasons for buying are no longer valid.