How Alternative Investments Offset Volatility?

Since the 2008 crisis, the sophistication of alternative investment products have also evolved drastically

Eight years ago, the financial crisis crippled the American banking industry, and the devastating effects rippled across the world. It is now a globally accepted fact that top world governments, central banks, economists, investment bankers and financial journalists were all caught off-guard by the nature and extent of the crisis and this led to a massive fallout across all asset classes.

The situation began to ease out by 2010 and since the beginning of 2012, the markets have witnessed a bullish period, with most asset classes reporting strong gains fuelled by an economic recovery. However, in the past six months, the global markets began to witness significant spikes in volatility on the back of concerns over an economic slowdown in China that had a cascading effect on the global economy as the country contributes nearly one-third to global growth. 

Further, the situation has worsened to an extent that many economic pundits are already predicting another crisis down the line. Gladly, this time, the global economic community, particularly the central banks, seems to be better prepared to tackle any downturn in the near future. Likewise, it will be prudent for global investors to also take necessary steps to safeguard their portfolios against uncertain times ahead.

One such risk mitigating strategy is portfolio diversification involving alternative asset classes. Historically, traditional asset classes, equity and bonds, generally move in tandem during uncertain periods, making the overall portfolio increasingly vulnerable to market movements. 

On the contrary, alternative asset classes that include venture capitalist, private equity, hedge funds, real estate, commodities, etc have low correlations with equities and bonds, and therefore can produce a good risk adjusted return over a reasonable time period, while reducing the overall risk and volatility of the portfolio.

For instance, an analysis of asset class performance during the past two years clearly indicate that alternative investments such as real estate and gold have outperformed most traditional asset classes under coverage. 

To understand this better, let us consider a couple of investment cases: 

In Case A, we have a traditional portfolio with 60:40 split between Equity and Bonds, respectively. 

In Case B, we have a diversified portfolio with 40:20:40 split between equities, bonds and alternative asset classes particularly real estate and gold. 

During this period, investment in Case A would have yielded a negative return of 16.5 per cent while a more diversified investment portfolio in Case B would have a relative outperformance to Case A by approximately 10.5 per cent. 

Of course, this is a simple example and alternative investments in the real world are far more complicated, however, these cases do illustrate the importance of a diversified portfolio and how investors can minimise their risk during volatile times.

Given the current market volatility and rising concerns over an uncertain macroeconomic environment, interest rates and inflation, it will be wise for investors to bring in the sophistication and diversity into their portfolios and review the role of traditional asset classes in future portfolio construction. 

Further, alternative investment products have a non-traditional approach which enables them to invest in areas and ways traditional investments cannot, thereby improving the overall risk-return characteristics of a portfolio. 

Moreover, since the 2008 crisis, the sophistication of alternative investment products have also evolved drastically and they are more conducive for a broader universe of investors as compared to a decade ago, wherein such offerings were limited and mainly reserved for institutions and high net worth individuals. Further, this evolution is likely to continue going forward, driven by the need to differentiate in a competitive environment.

Now that we have established the importance of a diversified portfolio, it is equally important to understand the limitations of alternative asset classes and the way forward. 

Firstly, alternative investment strategies often require a longer term commitment compared to more traditional portfolios, which can be liquidated at the investor’s discretion. 

Secondly, given the non-traditional investment approach, it is always advisable to seek services of professional asset management firms while drafting an alternative investment strategy. Although the fee structure of asset management firms can be on the higher side as compared to a simple brokerage or commission in the case of traditional portfolios, their advice is often worth the money spent.

In conclusion, portfolio diversification is the first line of defence in reducing overall investment risk, especially during volatile times. Spreading your funds across different asset classes can reduce the impact of an unexpected fall in one of them. Further, it is equally important to seek professional advice while drafting an alternative investment strategy. - gulfnews

Link - Investors Look Abroad

What Do Alternative Investments Bring to an Investors’ Portfolio?

Market volatility since the turn of the year has heightened the perception that traditional assets such as equities and bonds are entirely correlated with one another. 

Leading equity indices falling by 20 per cent, thus flirting with bear market territory, and concerns with bond market liquidity, all serve to make investors nervous and encourage a flight to safe havens such as cash, gold and government bonds. 

However, for many with longer-term horizons, this period has simply been a wake-up call that has heightened the extent the underlying constituent assets of their portfolios are interconnected.

We have seen a growing level of interest from intermediaries in ‘alternative’ assets that are designed to provide a bedrock of return, irrespective of what factors are driving traditional asset markets.

Price performance of indices over 1 year

Source: FE Analytics


The term ‘alternatives’ is very broad and covers many different types of assets, from commodities and infrastructure plays to absolute return and global macro funds. More specialised alternatives include investing in rare coins & stamps, wine and works of art. 

The approach is to hold multiple different types of assets in this space in order to maximise diversification benefits and minimise risk. 

The asset allocation models on all the managed portfolios are aligned to a particular benchmark, with the weight apportioned to alternative assets ranging from 5 per cent in the Income Index to 15 per cent in the Conservative Index.

Depending on the strategy, and relative positioning versus the index, it normally have between three and seven holdings within the allocation.

Infrastructure funds give a good representation of the kind of characteristics for when assessing alternatives.

Infrastructure assets are the facilities and basic structures essential for orderly operation of an economy. Transportation, education and health facilities, telecom networks, water and energy distribution systems provide essential services to communities.

The high barriers to entry and the monopoly-like characteristics of typical infrastructure assets mean that their financial performance is highly unlikely to be as sensitive to the economic cycle as many other asset classes.

Infrastructure investments are generally low risk, given the stable and growing demand for the basic services provided, together with regulation and the longer term contractual nature of revenue.

The nature of such businesses also means infrastructure funds will often pay a good yield as well as capital appreciation.

Many alternative investments funds are invest in debt, equities and derivatives and are designed to benefit from market volatility.

The approach to risk analysis and management is very similar to how we construct our over-arching portfolios in terms of pre-trade risk, stress-testing and scenario analysis.

These multi-asset funds have clear stated performance objectives, rather than benchmark constraints, and offer the opportunity to provide genuinely uncorrelated returns by being able to take long and short positions across various asset classes and geographies.

However, alternative investments should not be mistaken for low risk. In isolation they can be just as volatile, if not more so, than traditional assets. Return profiles can be erratic and typically they favour a long-term investor, rather than someone looking to time the market to make a quick killing.

Its real value to us is the low, and sometimes negative, correlation it exhibits to other holdings within the aggregate portfolios which, when analysed at the construction level, serves to reduce overall risk without impacting on expected return.

When looking at holdings from a portfolio construction point of view, each one should be there in whole or in part to do a specific job, whether it be to provide capital growth, income, risk mitigation or even exposure to a particular investment theme. What really matters is how all the elements knit together to produce the overall portfolio.

Historically commodities have exhibited negative correlation with equities. However, given that commodity demand and supply continues to drive markets (with exceptions such as gold) resource-based funds certainly fall into this category at present.

Alternatives can be a valuable tool to assist in engineering a well-balanced, risk appropriate portfolio, but care must be taken when adding a holding to an existing portfolio; when analysing candidates for possible inclusion many turn out to be little more than equity or bond proxies, defeating the object of holding an ‘alternative’ in the first place. - trustnet

Weathering the Storm: Marriott's Six Investment Tips for 2016

The global investment landscape is in the midst of considerable change, and this has been reflected by unusually volatile markets. Not only have interest rates begun rising in the US for the first time in almost a decade but China’s economic growth is faltering as it transitions from a production to a consumption driven economy. 

Not surprisingly, many investors are uncertain about where to invest. Instead of worrying about economic variables which are out of your control, Marriott believes that following the below investment principles will stand you in good stead for the years ahead.

1. Invest for income and let the capital take care of itself. The value of a business is based on the income or earnings it can generate. Only through increasing its income can the value of a business increase, a maxim well known by those running their own businesses. Over the long term, this principle holds true for investments. Following this philosophy, Marriott only invests in securities that provide reliable and growing income streams regardless of global slowdowns, exchange rate volatility and varying interest rates.
2. Offshore, offshore, offshore. With dividend yields of some of the largest companies in the world trading on attractive dividend yields, equity valuations in first world markets are presenting investors with a good opportunity to generate inflation beating returns over the next five years. Multinational companies, such as Coca-Cola, Colgate-Palmolive, Kellogg’s and Nestlé, have consistently produced reliable and growing income, which in turn has led to capital growth. Although listed on first world stock exchanges, these businesses transcend geographic boundaries, and will benefit from the anticipated emerging market consumption boom in the years ahead.
3. Equity exposure (especially offshore) is key.  Equities are attractively priced relative to bonds and cash in first world markets.  Very low interest rates mean investors can currently receive more income from equities than government bonds and money in the bank. This is a very rare occurrence as equities, unlike bonds, also provide investors with income growth which ultimately translates into capital growth.
4. Know what you are investing in. When investing, try to understand in which asset classes and in what businesses your money is actually being invested. Don’t speculate with your life savings. Speculating invariably involves buying and selling investments based on very little fundamental knowledge and typically produces enormous anxiety and poor results in practice. Rather buy and hold companies that form an integral part of the day-to-day lives of consumers, and will continue to grow their dividends regardless of economic conditions.
5. Don’t pay too much for an income stream. Avoid any investment where the dividend yield is well below the historic average.  Paying too much for an income stream will likely result in poor returns over the longer term.
6. Remember, above all investing is ultimately all about income. Capital growth may receive a great deal of investor attention; however, investing should ultimately be focused on building an income stream to fund a lifestyle. Don’t worry about economic variables which are out of your control. It is difficult to predict interest rates, the future direction of the exchange rate, or the stock market. Rather concentrate on what is actually happening to the businesses in which you are invested and monitor the income produced by these investments. - rnews

Only One Structured Product Loses Capital in 2015

An inaugural review of structured products complied by Structured Product Review and Lowes Structured Investment Centre has shown 98 per cent of structured products generated positive returns last year.

The UK market analysis also showed 424 products matured in 2015, with seven returning capital only, while just one product lost capital.

The research showed 80 per cent of the sectors’ maturing products are linked solely to the FTSE 100 index.

All 324 products linked solely to the FTSE 100 generated positive returns and the average term of all products maturing was 3.8 years.

Headline Data	2015	5 Year
Number of products	424	1,875
Number that generated positive returns	416	1,619
Number that returned capital only	7	214
Number that lost capital	1	42
Average duration/term	3.8 years	3.7 years
Average annualised return	6.8%	6.36%
Average top quartile annualised return	10.34%	11.54%
Average bottom quartile annualised return	3.75%	0.72%

Zak De Mariveles, chairman of the UK Structured Products Association, said the 2015 performance figures reveal the success of structured products in the UK, while the five-year data also emphasises that performance has been consistently positive over the longer term history of the research, including producing strong returns even when the underlying markets are not performing well.

Robert Bray, partner at Imperious Capital, said financial advisers tend to be influenced heavily by events of the past in decision making.

He said: “Various issues in the past certainly made us and some in our peer circle wary of embracing structured products – but we keep an eye on the sector, for signs of change, value and credibility.

“In an increasingly alien investment landscape, I do think as independent advisers we have a duty to be examining all options for our clients, diligently of course, and in the case of structured products not simply assuming that current offerings are simply a repeat of past offerings.”

Mr Bray added that it was inevitable that structured products are not suitable for all clients, however, it is implausible that they will be unsuitable for every single client of every adviser.

Lowes Structured Investment Centre is holding a webinar to present the review for professional advisers towards the end of February. - ftadviser

Structured Products Defy Market Volatility to Deliver Strong Returns in 2015

Structured products can offer protection from market turmoil

In what was generally a tough year for investors in the FTSE 100, all of the structured products that are linked to the UK’s blue chip index matured with a gain in 2015, and only one product linked to any market that matured during the year cost investors money.

Structured products offer private investors the chance to invest in the future direction of a particular market without buying the shares. So an investor can for example, look at the level at which the FTSE 100 is trading today, and invest in the market rising above a certain level, or not rising above a certain level, at fixed dates into the future. For many private investors, having allocated capital to funds that do well when the FTSE rises, a structured product that can perform is the market does somewhat less well is an interesting diversifier. 

All the FTSE 100 linked structured products made positive returns for investors, while the top 25 per cent made annualised returns of 9.49 per cent. The bottom quartile of FTSE-linked products delivered an average annualised returns of 4.28 per cent.

Ian Lowes, founder of comparestructured products.com told What Investment, ‘Looking at all products maturing in 2015, out of the 424 IFA distributed products, only 8 failed to produce positive returns with only one of these delivering a loss. In the year that the FTSE 100 fell by 4.67 per cent, all of the 347 IFA-distributed structured products linked solely to this index of the UK’s largest companies made a gain for investors.’

These on average made annualised gains of 6.59 per cent over an average term of just over four years, compared to the average return of less than per cent from the FTSE 100 Index and 4.54 per cent for the IA Protected sector over the same durations.

The average return per annum of the top 25 per cent of FTSE 100 products was 9.49 per cent.’

He continued, ‘Even the bottom quartile of FTSE-linked products delivered an average annualised returns of 4.28 per cent.’  

The data also holds up over a longer period of time, over the past five years,
looking at all products maturing over the five years to 31st December 2015, out of the 1875 IFA distributed products, nearly 98 per cent of products (1833) made a gain for investors or returned capital only, while only 2.2 per cent, or 42 products, made a loss. - whatinvestment

How to Ensure Structured Product Suitability

Back in the dark days of 2008/09, the market for structured products was put under the microscope of the then FSA after the collapse of Lehman Brothers left some investors high and dry.

The findings of the FSA review into the suitability of advice on these structured products (Structured Products: Thematic Review of Product Development and Governance) found three main failings: a failure to consider the suitability of the products from a risk perspective, an over-concentration of clients’ assets into structured products and a failure to consider the tax position of the client.

In 2016 it is easy to look back and say that these failings are not unique to structured products; indeed, there is nothing inherent in structured products that led to these failings. Rather, a lack of coherent investment philosophy and process, coupled with a culture of intermediating product as opposed to offering a genuine advice service led to these failings, and they will apply to many other investment products.

One could argue that the key to correct due diligence and research of the market for structured products is no different from any other investment solution; it is about having the right funnel. If you start with the whole of the relevant market you can filter down by asking some broad-based “enhanced suitability” questions.

For example, does the client need access to their money in an emergency? If so, then all fixed- term products can be discounted and only easily liquidated assets should be used. Does the client require FSCS cover on all their assets? This means structured capital at risk products that are classed as a loan to the investment bank can be discounted, but structured deposits should be assessed. A good investment advice process should have a series of these broad enhanced suitability questions in order to filter the wider market down.

At this point, it is crucial to be able to assess both risk and capacity for loss and apply the findings of this process to investment selection. There must be a logical link between the investment selected for the client and the agreed risk profile and documented capacity for loss. It is noteworthy that many firms are still getting this wrong, as the FCA review of suitability in wealth management firms has found (Wealth management firms and private banks: suitability of investment portfolios). When assessing structured products against the risk profile and capacity for loss of the client, there are many considerations. Once simple mnemonic I have seen firms apply is CLEAR:

• Counterparty – who is making what promises and how likely they are to keep them?

• Length – is the term appropriate for the client’s planning needs and tax circumstances?

• Exposure – what is the client actually exposed to and does this meet their capacity for loss?

• Access – where can the product be held (for example, Isa, Sipp) and is this appropriate?

• Risk – does it match the client’s profile?

Naturally, the more complex the type of product, the more difficult it is to apply these screening criteria. The more design features manufacturers build, the more onerous the process for advisers. This is why structured deposits, where the capital is only exposed to counterparty risk rather than any market risk, are often more readily incorporated into the advice process. One simple rule of thumb can therefore be, if it is too complicated to explain to a client, don’t use it.

Of course, a strong advice process needs to be backed by competent advisers and there is no substitute for structured CPD. This is one of the reasons why when we launched our structured deposit last year we decided to only allow advisers who have undertaken our CPD education to have a unique agency number – demonstrating that they understand the above process, and protecting both advisers and their clients from unsuitable advice. - fundstrategy

2015 Proves a Strong Year for Structured Products

Of the 424 structured products that matured in 2015, only one failed to return capital to investors, a new report shows. 

According to the 2015 version of StructuredProductReview.com´s annual Structural Product Performance Review, of the remaining 423 products, seven returned capital only and the rest generated positive returns. 

The average annualised return across the spectrum was 6.8% with an average duration of 3.8 years, the report said. 

There was however a fairly wide gap between the bottom and the top quartile. The bottom quartile returned 3.75% on average, while those products in the top quartile produced an average annualised return of 10.3%. 

Looking at the numbers on a more granular level. 118 structured deposits matured during the year, returning 4.8% to investors on average. Three returned only capital. 56 capital ´protected´ products matured, 53 of which generated positive returns, while 250 capital at risk products matured, one of which returned only capital, while one lost capital. 

On average, capital protected products returned an annualised 5.5%, while capital at risk products returned 11% on average. 

To put this into a broader perspective, the review also examined all the products that have matured over the past five years. 

Here, the consistency is more remarkable. Of the 1,875 products that have matured, only 42 have lost capital, while 214 have returned capital only. At a headline level, the average annual return offered over the five years is 6.4%. However, this does mask a huge disparity between the best and worst options. Those products in the top quartile returned an annualised 11.5%, while those in the bottom quartile could only manage 0.7%. 

¨The data is irrefutably impressive, which is good news for those advisers and investors who have been embracing structured investments over the years,” said Chris Taylor, head of strategic development at Lowes Structured Investment Centre. 

¨It should also prove to be persuasive, if not copelling, for those advisers and investors who may have been sceptical or even cynical of the sector.¨ - international-adviser

2015 Proves a Strong Year for Structured Products

Of the 424 structured products that matured in 2015, only one failed to return capital to investors, a new report shows. 

According to the 2015 version of StructuredProductReview.com´s annual Structural Product Performance Review, of the remaining 423 products, seven returned capital only and the rest generated positive returns. 

The average annualised return across the spectrum was 6.8% with an average duration of 3.8 years, the report said. 

There was however a fairly wide gap between the bottom and the top quartile. The bottom quartile returned 3.75% on average, while those products in the top quartile produced an average annualised return of 10.3%. 

Looking at the numbers on a more granular level. 118 structured deposits matured during the year, returning 4.8% to investors on average. Three returned only capital. 56 capital ´protected´ products matured, 53 of which generated positive returns, while 250 capital at risk products matured, one of which returned only capital, while one lost capital. 

On average, capital protected products returned an annualised 5.5%, while capital at risk products returned 11% on average. 

To put this into a broader perspective, the review also examined all the products that have matured over the past five years. 

Here, the consistency is more remarkable. Of the 1,875 products that have matured, only 42 have lost capital, while 214 have returned capital only. At a headline level, the average annual return offered over the five years is 6.4%. However, this does mask a huge disparity between the best and worst options. Those products in the top quartile returned an annualised 11.5%, while those in the bottom quartile could only manage 0.7%. 

¨The data is irrefutably impressive, which is good news for those advisers and investors who have been embracing structured investments over the years,” said Chris Taylor, head of strategic development at Lowes Structured Investment Centre. 

¨It should also prove to be persuasive, if not copelling, for those advisers and investors who may have been sceptical or even cynical of the sector.¨ - international-adviser

Maybe You Should Sell Some Stocks

Not everyone should sit still despite the market's turbulence.

When stocks were having an especially rough go of it in early January, one of my friends asked, "Should I make any changes to my investments in this crazy market?" Before I could answer, she corrected herself. "I know, I know. You're going to tell me not to sell. Everyone says not to sell."

There's a laundry list of good reasons why not selling stocks in periods of market stress has become conventional wisdom. Emotion--specifically, fear--could be clouding your judgment. And if you have a long time horizon, you should be a buyer of stocks when they're down, not a seller. Far too many investors have exhibited a tendency to reduce their equity exposure at the tail end of a bear market; when stocks rebound, they're on the outside looking in. And all-or-nothing market shifts--you're all-in on stocks one day, all-out the next--are conducive to poor investment results.

But one-size-fits-all asset-allocation recommendations--including the admonition not to sell anything in down markets--invariably don't fit some. In particular, investors who are getting close to retirement and have been taking a "let the good times roll" approach to their portfolios may want to use the recent market sell-off as a wake-up call to take some risk out of their portfolios. For them, selling stocks may not just be psychologically beneficial; it may be entirely warranted from an investment standpoint, too.

Hands-Off Investors More Equity Heavy Now 

One unifying theme among most (but not all) strategic asset-allocation plans is that the equity piece of the portfolio declines as the investor gets closer to needing his or her money. The rationale is straightforward: For near-term expenses, it's safer to have the money parked in assets where there's a low probability of having a loss over that short time horizon. That argues for holding cash and bonds for the portions of the portfolio that will supply spending needs for the first part of retirement (or fund almost any goal you hope to achieve within the next 10 years, whether amassing a home down payment or paying tuition). Meanwhile, stocks are much less reliable for short-term cash flow needs; they have greater long-term potential but a higher potential for short-run losses.

But investors who have been employing a laissez les bons temps rouler approach have seen the high-risk portion of their portfolios increase in the past seven years, while the lower-risk piece (to the extent they ever had it) has declined in importance. Even factoring in the recent sell-off, stocks have roughly tripled since scraping their lows in March 2009. Bonds haven't been terrible, but they certainly haven't kept up. 

Thus, a portfolio that consisted of 50% stocks and 50% bonds seven years ago would be roughly 70% equity/30% bond today, assuming the investor had not added to stocks but was reinvesting her dividends. The investor who came into the rally with more than half of her portfolio in stocks, or used stock market strength as an impetus to add to her stock holdings, would have an even higher equity weighting.

Risk Capacity Trumps Risk Tolerance 

Some investors hurtling toward retirement might argue that they have a high pain threshold. They've been stress-tested and they know they can handle the volatility that can accompany a high equity weighting. They didn't freak out in 2008, and they may have even added to their stock holdings on weakness.
But there's a difference between risk tolerance and risk capacity. Risk tolerance is how much you can lose without feeling psychic discomfort. Risk capacity, by contrast, is how much you can lose without changing your plans. As you get closer to retirement, your risk capacity declines, even though your risk tolerance may still be that of a 30-something.

If you haven't built up enough short-term reserves because you've been focusing on your risk tolerance instead of your risk capacity, your retirement plan is that much more vulnerable to sequence-of-return risk. That means that if you encounter a lousy equity market early on in retirement and need to spend from the declining equity portfolio, that much less of your investments will be left to recover when stocks finally do. Your only choice to mitigate sequence-of-return risk--assuming your stock portfolio is in the dumps and you don't have enough safe investments to spend from--will be to dramatically ratchet down your spending. Needless to say, that's not something most young retirees are in the mood to do.

Further compounding the case for derisking a portion of your portfolio if you expect to retire within the next 10 years is that valuations, while not exceedingly expensive currently, aren't especially cheap, either. That means that investors selling today aren't selling themselves out at distressed levels, even though the market has stumbled a bit recently. The typical stock in Morningstar's coverage universe was trading at a roughly 11% discount to fair value as of Feb. 3, 2016. That's not too discouraging, but many of the bargains are clustered in cyclical segments of the market like basic materials and energy. Due to global economic malaise, they could stay down for a while. The so-called Shiller P/E ratio tells an even more glum tale.

How Much Safety Is Enough?

That's not to suggest that everyone should be a seller in the current market environment. Younger investors with very long time horizons should heed market experts' admonitions to not sell anything. And people nearing or in retirement should be sure to hang on to some stocks, too. After all, returns from cash and bonds are unlikely to keep up with inflation over time. To help preserve a portfolio's purchasing power, even older retirees need the growth potential that can accompany stocks. - morningstar

How To Win In a Volatile Market Environment

Heightened market volatility would require investors to pursue portfolio diversification more than ever. Photo: Bloomberg

Financial markets could be more volatile in the Year of the Monkey. Hence, investors are advised to diversify their investments. Here are some things worth bearing in mind.

As expected return from fixed-income products has declined, investors would rely more and more on return from equity investments. This calls for increased risk appetite.

Many central banks are adopting aggressive quantitative easing policies, leading to lower yields and higher prices of the bonds. However, fixed-income is still a crucial part of portfolios as it provides stability and better return than holding cash. For markets like Hong Kong, Singapore and Taiwan, where cash return is close to zero, it is especially the case.

If an investor pursues higher returns, he/she would naturally switch the focus to high-yield corporate bonds or emerging market bonds. A deep analysis and proactive management would help a lot in such investments at a time when the oil price has been falling and the leverage ratios of some emerging markets and high-yield corporate bond issuers are climbing.

Stock markets in emerging economies have been quite challenging in the past years. Strong dollar, weak commodity prices and poor corporate earnings have all had a negative impact on the markets.

We believe investor sentiment on emerging economies will improve when the dollar weakens, commodity prices bottom out and the Chinese economy stabilizes.

All these changes will take time. However, we still believe that emerging markets, especially Asian countries, can offer investors opportunities for good returns.

Diversified allocation is more important this year amid the expected volatility. Given a relatively high valuation of fixed-income products, we believe the equity markets in developed economies will provide better returns. Also, Treasuries can contribute, in terms of stability, to the portfolios.

Bonds and stocks tend to go in opposite directions. However, when there’s higher pressure in the market, it is likely bonds and stocks will show positive correlation temporarily. So investors should keep that in mind.

Overall, the situation of lower fixed-income return and sluggish emerging market equity performance will possibly last longer. The old way of investment diversification may become ineffective as the correlation between bond and stock prices is temporarily disrupted.

Overall, investors should adopt more flexible ways of asset allocation to deal with lower returns and higher volatility. - ejinsight

This article appeared in the Hong Kong Economic Journal on Feb. 15.

Good Habits Today Will Assist Retirement

One thing we all have in common is there will be a point in our lives where we will no longer be able to work and will have to start our retirement. Having good habits today will help secure our future.

Life insurance. “Eighty-five percent of the best retirement savers had at least $100,000 in life insurance coverage,” a March 2015 CNBC.com article stated. Talk to your insurance company on which is best for you, whole-life or term-life insurance. Either way, you want to be sure that you are covered in case you become ill, incapacitated or pass away. You do not want to use your retirement money to cover these expenses.

Diversify. Mix up your investments that fit your risk tolerance. Those who are further away from retirement can capitalize in riskier investments than those who are closer to retirement. Having your investment in one type of investment is risky. Don’t put all your nest eggs in one basket. Deciding what to invest in may require some professional help.

Retirement at a dollar amount. When asked the question, “When do you want to retire?” many of us reply with an age. Sometimes we are not ready to retire exactly at 65. Your retirement is about freedom and it would be great to say, “I retired as a millionaire.” Know exactly how much you need to retire comfortably.

Focus on the long term. We put a lot into our retirement investments, and it is hard not to feel some anxiety when we see the market go on a decline. It is important not to panic and do something that you will regret later. Many investors see a dip in the market as an opportunity to acquire more equities at a lower price.

Simple investing. You do not need an expensive and complicated investment portfolio to earn a lot of money. In fact, many of those expensive investment plans come with large investment costs. Those investment costs can reduce the amount of money in your nest egg.

Estate planning. If you own real estate, you should have a living trust that ensures certain people get the assets you want to pass on to them. You should also have documents stating whom you designate as your medical caregiver in case of an emergency. These should be reviewed on a yearly basis.

Review regularly. Take a look at your retirement plan every six months or yearly. Keep track of how your investment is performing. Be adaptive and recognize that the markets change. As your life changes so do your retirement goals. Ask yourself, “Am I contributing enough?” When you re-enroll, take a look at your plan and strategy. Do they still meet your needs? If you see that your portfolio is constantly trending downward, talk to your adviser.

Stay healthy. Your health when you retire is important. As we age, health care becomes more expensive. If you retire in good health, it is likely that your medical costs will stay low and you can enjoy that retirement money. - pacificdailynews

Asset Allocation: Start Early and Be Regular

Rules of investing are simple: grow your wealth in the long run, and for the short term, it should add to income

To build a portfolio of investments for your child’s future, you should start early. This way you will have the luxury to pick and choose your investments. However, this is not a simple task. You have to decide on whether you want safety and assurance when it comes to investing for your child’s future, or do you want high-return investments to get a sizeable corpus as, say, you want to send your child abroad for studies, or do you want a bit of both?

Usually, it’s a combination of both that works. But before listing out products, one has to put in place a workable strategy. Here are some suggestions by financial planners, which can act as a guide for you to start or to catch up if you have missed the early bus.

Keeping goals separate

Before you get down to planning for your kids, get the basics right. Buy a term life insurance plan and safeguard your kid’s future from any eventualities. Have a good medical policy for the family. Then you can start planning investments.

Usually, one has to plan for four phases: school education, college education, post-graduation, and marriage. B. Srinivasan, director, Shree Sidvin Financial Services and Investments Pvt. Ltd, suggests that an ideal way to plan for your kid’s schooling is to build a corpus that at any given point in time, has three years’ worth of fees.

Usually, basic education expenses are addressed from regular income flow, and it’s higher education that needs to be planned for more thoroughly.

Amount of money you need to allocate to this goal depends on which type of higher education you are looking for—whether it is a college in India or abroad, or professional degree.

“Many parents have ambitions to send their kids abroad. But they may not have the capacity to save up that much. We need to understand our earnings better and see how much we can save,” said Nisreen Mamaji, a certified financial planner, and founder, Moneyworks Financial Advisors.

But while saving for your children’s future, financial planners say that this should not compromise other key goals, mainly retirement. “I ask my clients to make retirement planning their primary objective. Children will be able to take loans for their education when they grow up and would have their work life to repay. But when you retire and you don’t have money to take care of yourself, it’ll be a problem,” said Sanjay Durgan, founder and director, AbunDanze Wealth Management LLP, a Delhi-based company that advises on mutual funds (MFs).

Yet there are some who may not have planned well, and dip into their retirement basket to fund their children’s education. “If you have used up funds earmarked for other purposes, you will have to refill that basket before that goal comes into play,” said Raghvendra Nath, managing director, Ladderup Wealth Management Ltd.

Go easy on the non-discretionary spends. “We don’t usually advise clients to adjust other goals for a child’s education. Rather one can adjust the house, luxury, or spending needs,” said Surya Bhatia, a Delhi-based certified financial planner. Since planning for your child’s education is an on-going exercise, amounts can be increased later if your income goes up.

Selecting assets

A thumb rule is that if the goal is long-term (7-10 years or more away), then use growth assets such as equity to address them. On the other hand, if you only have 2-3 years, then it’s better to opt for fixed income options.

“If you are saving for your child’s higher education, and if it is at least 10 years away, equities will work best. Moreover, you will continue to earn and your income growth can be a hedge for this goal. Thus, you can afford to take higher risk to maximise returns,” said Nath.

Equity MFs are the way to go if planning for your kid’s higher and post-graduate education. Put money in through systematic investment plans (SIPs).

D. Muthukrishnan, a Chennai-based MF distributor, however, suggests that parents should avoid investing in a child’s name as it has no special advantage. “If the father is the investor, the child should be the nominee and the mother should be a guardian,” he said. Also, by investing in their own name, parents retain control and discretion over the corpus once the child becomes a major, he added.

But don’t parents get tempted to dip into this pool for reasons other than their child’s benefit? Muthukrishnan says that when he sends reports to his clients who are undergoing their children’s financial plan, he labels the reports appropriately, so that the child’s name is on top of the report. “It has a psychological impact on parents and prevents them from touching this corpus for other purposes,” he said.

If you are planning to send your child overseas, you can consider investing in dollar-denominated equity funds as well. But this isn’t for everyone.

While these funds will help mitigating currency risk, the underlying investment itself can be risky. “It makes sense theoretically, but you need to be well versed with the equity market in the country you are investing in. The risks are unknown for the layperson and we don’t really advise using these funds,” said Nath.

Most planners suggest a mixture of diversified equity funds, and small- and mid-cap funds depending on your risk appetite. Though fixed income options like tax-free bonds (10-15 year maturity) and Public Provident Fund are available, they aren’t appropriate to grow wealth and don’t give above-inflation returns in the long run.

Now, if you haven’t planned early for your child’s higher education and find yourself with only 2-3 years at hand, it’s best to go for products where the payout is relatively stable such as fixed deposits or fixed income MFs. However, keep in mind that you will have to save much higher amounts.

Marriage is another goal that some parents want to plan for in advance for. Here, too, start saving early. In the Indian context, given the focus on gold when in comes to marriages, you could accumulate gold in small quantities (with the purpose of using it).

“The new gold bond scheme is a good option since you earn interest along with buying a security which is a securitised substitute for gold,” said Khyati Mashru, founder, Plantrich Consultancy LLP, a Mumbai-based financial planning company.

Should you take a loan?

An option to take care of the shortfall in education or wedding costs is to take a loan. But financial planners are divided on this. “Parents shouldn’t put pressure themselves to accumulate a corpus. As we reach closer to the goal, if there is a shortfall, then parents can take a loan. Once the kids get jobs, they can help their parents repay the loan,” said Mamaji. However, others say parents should not disturb their own retirement planning. “A loan can help and the parent should make provisions to save towards interest repayment rather than leaving it only to the child,” said Mashru.

However, Srinivasan doesn’t agree. “To a large extent, we dissuade students and parents from availing of education loans. It curtails the child’s freedom because repayment starts immediately after education and the child has to get a job,” he said. Srinivasan cited the case of a client’s son had gone to the UK to pursue a Master’s degree in law in 2006. In 2008, when the boy graduated, he couldn’t get an appropriate job and so wanted to study something else till the time he could get a proper job in the UK. He didn’t want to come back to India, but because he had taken an education loan, he had to return and he started working here in a law firm.

Taking an education loan should be the last resort, said Bhatia. “Servicing interest payments can become a burden,” he added.

Personal loans, too, come with high interest rates. So, do the math and assess your repayment capability before taking a loan.

Mint Money take

There is no substitute to starting early and being regular. Once that is done, it’s just a matter of choosing products. Rules of investing are simple: in the long run, grow your wealth, and for the short term, look of products that can add to regular income. So, plan for your child’s future through a simple yet thought out process of goal-setting. - livemint