The Normal Person's Guide To Alternative Investments

It’s pretty easy to get started investing. Once you dig into it, though, a lot of questions come up that complicate the process. You might have come across the phrase alternative investments, and if you’re new to investing, you probably have no idea what it means. Here’s a quick breakdown for the average personal investor.

What is an “Alternative Investment”?

Let’s say you’re invested long-term for your retirement. You have a superannuation account that does all the work for you, or you have a fair mix of stocks and bonds in mutual funds. Either way, you’re already doing pretty well for yourself.

As your net worth grows, though, it’s time to take your portfolio up a notch. You want to diversify it even more, because, over time, a diverse portfolio is a lucrative one. A properly diversified portfolio includes different types of stocks and bonds — international stocks, for example — and it also includes something called alternatives. 

Alternatives can be useful in a portfolio to provide some balance. Often (but not always) when stocks and bonds drop, assets like commodities and real estate may rise. “Alternative asset” is a broad term that includes assets that are not stocks, bonds, or cash. Examples would be commodities (like gold), private equity and hedge funds, collectibles, and real estate. Often they are more complex assets that are more difficult to value and harder to turn into cash.

So technically, your old collection of Beanie Babies counts as an alternative. However, to invest in alternatives properly, it helps to understand how they work in a little more detail.

Why You Should (and Shouldn’t) Invest in Alternatives

If you’re just starting out with investing and playing catch up with your retirement, you might not be that interested in alternatives. You just need to focus on saving and building a simple set-and-forget portfolio. When your net worth starts growing, though, it might be time to squeeze alternatives into your portfolio. Financial Samurai’s Sam Dogen explains why:

With a larger net worth, you invest some of your savings into Alternative asset classes by age 35. Alternative asset classes may include: private equity, venture capital / angel investing, or starting your own company. You’ve got stocks, bonds, and real estate down pat. With free liquidity, you dable into the unknown because you never want to look back and say, “what if.”

After the age of 40, you’re looking for a more balanced mix in your net worth. As a result, you purposefully invest less in stocks and more into bonds and alternative investments. Your real estate equity also holds steady, market willing.

This is important: Alternatives aren’t meant to replace your entire portfolio. They’re meant to enhance it. Some investors will invest strictly in alternatives, though, like hedge funds. Warren Buffett, considered to be the world’s greatest investor, reminds us that they’re not a great deal, according to CNBC:

During the financial crisis, Buffett bet the asset management company Protege Partners LLC $1 million that the S&P 500 will outperform a portfolio of hedge funds over the 10 years through 2017. Buffett said Saturday the index fund is beating the hedge funds by nearly 44 percentage points over 8 years.

When the stock market drops considerably, though, people tend to freak out and, against better judgement and statistics, sell their stock and turn to alternatives like real estate, gold or other commodities. While those investments can be fruitful, depending on the time-frame you’re looking at, they’re also volatile and probably not smart investments for your retirement.

For example, gold prices soared during the ’80s and the Great Recession, but the Motley Fool’s John Maxfield explains why this doesn’t paint a full picture:

But the problem in both of these cases is that the price of gold soon dropped as quickly as it had formerly climbed.

It was less than $600 an ounce by 1985. And since peaking in 2011, gold has lost more than a third of its value.

To benefit from these fluctuations, then, an investor would have to time the market — something we know to be dangerous, if not impossible, for the average investor to do successfully.

In other words, alternatives are great for hedging and balancing your portfolio when the market drops, but that’s it. You should have them in your portfolio, but again: They’re not meant to replace your portfolio.

Calculate How Much of Your Portfolio Should Be in Alternatives

Here’s a basic rule of thumb for how to calculate your asset allocation, that is, the amount of your money that should be invested in stocks versus bonds:

110 – your age = the percentage of your portfolio that should be stocks

That means if you’re 30, you’d put 80 per cent of your portfolio in stocks (110 – 30 = 80) and the remaining 20 per cent in lower-risk bonds. This is a good starting point, but it doesn’t account for alternatives. And most basic asset allocation calculators only include stocks, bonds and cash.

If you’re looking for a simpler solution, here’s what we suggest:

In most cases, alternatives should not be a significant portion of a retirement investor’s portfolio. I recommend 3%-7% depending on several factors both because of their volatility and their relatively higher cost to own (vs. stocks and bonds).

The factors Weir mentions include your risk tolerance, other assets in your portfolio and how close you are to retirement. Ideally, the closer you are to retirement the less you want to invest in stocks. Your portfolio then shifts to bonds, but you may also want to invest in more alternatives to balance things out. - lifehacker

Cash vs. Stocks And Bonds In 2016

Summary

• The expected returns of stocks and bonds are today low and do not compensate for the risk undertaken.
• The bubble in financial assets has created asymmetric risk on the downside.
• How much higher can stocks and bonds really go before the next bear market?
• Stay in the market – but keep some cash aside.

With almost all asset classes trading at very high valuations today, should you remain fully invested in stocks and bonds? Many would recommend to stay in the market and maintain a fixed allocation to different asset classes. While I agree that staying invested in the market is important, I would recommend you to consider increasing the weighting of one asset class that many forget: cash.

Cash seems to have become the most contrarian of all asset classes today. Everybody wants to be fully invested in the market to not miss the next potential bull movement. People are getting more and more greedy and you know the consequences: financial assets get bid up and trade today at above historic average valuations.

Bonds yield close to nothing and the expected returns of stocks are in the low-single digit area. So ask yourself: are you really missing that much by holding some cash today?

Asset allocation and weighting is a very relative question. Different asset classes must be compared and assessed against each other in order to determine what portfolio structure satisfy best the risk tolerance and objectives of the investor. Typical portfolios will be divided between stocks, bonds and possibly some alternative assets such as real estate. Since the expected return of cash is close to zero, it is often a quickly eliminated asset class when considering the weighting of the portfolio.

But how attractive are bonds and stocks in 2016? And more importantly, how risky are they at today's valuation compared to cash?

Bonds yield close to nothing and are exposed to significant interest rate risk

Bonds are today trading at some of the lowest yields ever and generally considered as being very overvalued.

10 Year Treasury Rate data by YCharts

In many cases, they do not provide any real return after inflation and taxes to their investors and provide no protection in case of severe unexpected inflation or increases in interest rates.

I think that bonds are very overvalued. If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it. But that's not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued. I'll put it that way.

          Warren Buffett

Buffett made this statement not long ago; it was on May 4, 2015, on CNBC. Since then, rates have gone down further and even achieved the negative zone in Europe where you now have to pay to lend money. Buffett is not famous for taking short positions, but in this interview, he revealed that he would short this one asset class: bonds.

So relative to bonds, which make up the largest segment of the financial market, cash seem pretty attractive to me. You are not likely to have high opportunity cost by holding cash instead of investing in bonds. Perhaps, you could argue that rates can still go lower in the US, and that therefore you could increase your return in the form of capital appreciation. Note, however, that the lower the rates go, the bigger the bubble will become and the harder the landing will be once rates get back to historic normal levels. Cash at least is liquid, unlikely to suddenly lose its value, and can be stored until better yields present themselves.

Stocks have expected returns of about 4% per year and asymmetric risk on the downside

While bonds are extremely overvalued, you could argue that stocks present a better alternative at current valuations. I would agree on that one; however, I would remark that stocks are also very expensive relative to their historical average valuations. Their P/E multiple is today way beyond their average. The market is currently pricing the S&P 500 at over 25 times its earnings. The historical mean being only 15.6 times or 40% cheaper than today.

Source: multipl

You will note that historically every single time the P/E ratio passed 25, it was later followed by a bear market. Every single time. Ray Dalio, founder and co-chief investment officer of the world's largest hedge fund, Bridgewater Associates, believes that the expected returns for stocks are about 4% at current high valuations and that volatility will be above average. This equals approximately the current earning yield of the S&P 500.

Get ready for lower than normal returns with greater than normal risk. Take current bond yield (less than 2%) and cash (0%) and compare that to something like a 4% expected return on equities. Because of volatility, the 4% expected annual return pick up of equities over cash, or 2% over bonds, can be lost in a day or two.

       Ray Dalio

This does not sound too good to me either. The fundamentals of the global economy are not very strong, earnings are flattening, we risk a new recession and a potential new stock market crash, and the expected returns do not compensate for the risks undertaken at current high valuations.

Don't get me wrong; I am very long on stocks, but I am just trying to point out that the risk/reward ratio of stocks is not necessarily much better than that of cash today. While I agree that even a 4% expected return is better than nothing, you could also say that the risk of a sudden large loss isn't compensated by a large enough return. Stocks trade at very high multiples of earnings which equate to a low expected return and bonds yield close to nothing, so wouldn't it be reasonable to hold some cash aside?

Cash: the contrarian alternative…

Cash can be held without significant risk of losing value over the short run. We are today in a more deflationary environment, and it seems unlikely that we get high inflation anytime soon. By holding cash, you position yourself to take advantage of the next crisis, and will be able to allocate later at much lower valuations and achieve higher expected returns. You store the value for a future time and accept the low-single digit opportunity cost.

The investor that tends to outperform during a bear market is the one who had enough dry powder to buy assets when they were cheap. Our current bull market has been abnormally long and asset prices are today artificially valued at above average valuations which are not justified by business economics. I have no idea when the next bear market will be, but I feel quite certain that it will occur, and until then, the expected returns from financial assets are likely to be very low. The opportunity cost could well be worth the security provided by cash.

Final Thoughts

Stay invested in the market at all time, but not necessarily fully. When asset prices get very high and expected returns are low, there is nothing wrong with holding more cash. In today's market environment, cash has many positive attributes and is becoming more competitive with stocks and bonds. Cash should remain a smaller portion of your portfolio, but perhaps 10-20% in cash would be appropriate. It will not cost you a lot in form of opportunity cost, but will give you peace of mind and protection for the day when the bull market ends. Once the valuations get back to normal levels, I will feel comfortable being 100% invested with only the strict minimum in cash aside.

I, however, do not want to mislead you and cannot over-stress this enough: You have to keep most of your portfolio invested because you never know when the next bear market will be. It could take years for the valuations to start going down. Until then, even a low 4% expected return of bonds is more attractive than the 0% of cash. Cash should only be one asset as part of a diversified portfolio of other assets. This portfolio structure could be a win-win as if the market keeps going up, the investor is participating and if the market goes down, there is dry powder to buy cheaper. - seeking alpha

The Smart Money Is Worried About Stocks and Hiding More Money in Cash. Should You?

Four things you need to know before you follow the pros and stockpile cash.

With the S&P 500 and Dow Jones industrial average at all-time highs, you’d think that Wall Street would be rejoicing. But professional fund managers aren’t exactly jumping for joy.

In fact, global fund managers are sticking more cash in the proverbial mattress than they have in 15 years. A recent survey by Bank of America Merrill Lynch found that professional investors are now holding nearly 6% of their assets in cash, on average.

This may not sound dramatic, but that’s an even more defensive stance than fund managers took in the global financial crisis, which saw the biggest bear market since the Great Depression. This is also the highest level of reported cash since November 2001, during the bursting of the tech bubble.

Why is cash growing?

Part of this may be an attempt to safeguard their portfolios against a potential decline in the market now that stocks are at record highs, explains Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research.

For one thing, the bull market is now the more than seven years old, making it the second-longest rally in history. While there’s no rule that bull markets die of old age, there is a feeling that after a seven-year run in which stocks have gained 200%, equities may be due for a downturn, if not a rest.

What’s more, the market is getting more volatile—the S&P 500 lost more than 10% of its value earlier in the year, which is defined as a correction, and sank 5% in the immediate aftermath of the Brexit vote, which is defined as a pullback. Even though central banks around the world are holding interest rates at record lows to spark economic activity and risk-taking, investors understand that the stock market is historically expensive, which makes equities vulnerable.

And with prices getting frothy, “fund managers are having a difficult time navigating the investment landscape,” said Jack Ablin, chief investment officer at BMO Private Bank.

So is everyone. But before you turn to cash, you have to understand certain aspects about today’s market:

1) The fact that others are scared may be an argument for staying the course.

While a 6% cash stake is hardly a sign of terror, it is a measure of anxiety. And yet some financial pros see it as a contrarian indicator: According to Bank of America Merrill Lynch, whenever cash levels climb above 4.5%, it’s viewed as a buy signal for equities. When cash piles fall below 3.5%, on the other hand, it means a lot of investors are getting confident—and to the contrarians on Wall Street, that’s a sell signal.

2) Yes, there is some reason to be concerned…

Based on one traditional gauge of market valuations—which compares the price of stocks relative to 10 years of average corporate earnings—the S&P 500 is as expensive as it was leading up to the financial crisis in 2007. In fact, the market has gone through only three other prolonged periods where this “price/earnings ratio” climbed above 26, which is where it’s at now.

Those times were: before the global financial panic, before the tech wreck in the late 1990s, and in the lead-up to the Great Depression in the late 1920s.

This doesn’t mean that stocks are headed for another crash. But you can’t ignore valuations as they are considered the best indicator of future long-term stock market returns.

And the frothiness of the U.S. market is one reason why the asset management firm Research Affiliates projects that domestic stocks will produce a meager annual return of just 1.2% — after inflation — over the next decade.

3) …but you don’t have to turn to cash if you’re worried.

While cash is considered a safe haven in a market storm, other assets can offer some ballast—without taking you totally out of the market.

For instance, you could simply boost your stake in bonds. To be sure, bonds are themselves trading at frothy prices—especially Treasury debt. But valuations are less problematic in high-quality corporate bonds issued by large corporations. And in the January market correction, in which stocks fell more than 10%, the Vanguard Intermediate-Term Corporate Bond Index ETF  VCIT 0%  actually gained 1%.

You can also go with a balanced fund, which invests in a mix of stocks and bonds for you. The typical balanced fund holds about 60% of its assets in stocks and 40% in bonds, but fund managers often have discretion to tweak that mix based on market circumstances.

And yet another route is to focus on stock funds that have a strong track record for losing less in down markets.

Among domestic stock funds, a good example is Vanguard Dividend Growth  VDIGX 0.38% . According to Morningstar, the fund has lost 28% less than the broad stock market in down months over the past decade. For foreign funds, check out Tweedy Browne Global Value  TBGVX -0.08% , which has lost 46% less than the broad market in down months.

4) Finally, if you’re really scared, raise some cash—but in moderation.

After a seven-year rally, there’s no harm in taking some stock market profits off the table, especially if you have not rebalanced your stock-and-bond mix in a while.

But don’t go overboard. The wealth management firm Asset Allocation Advisors, in Walnut Creek, Calif., has above-average cash stakes in client portfolios for defensive reasons—but by a modest 4 percentage points over normal. Asset Allocation Advisors also raised its recommended bond allocation by a modest 4 points, while lowering stock exposure.

The firm told its shareholders that “a lower-than-average allocation to stocks has maintained stock market participation, while shielding their portfolios from much of the stock market’s risk and volatility.”

Notice they said shielding—not avoiding altogether. - time.com

10 Alternative Investments Outside of Stocks and Bonds

Investors in 2016 have to be scratching their heads when it comes to where to invest. The trend has been set for years now that investing in Treasury notes and bonds has generated too little yield to live off of, and forget about certificates of deposit (CDs), as quantitative easing and easy money have kept interest rates extremely low. All those worries over high market valuations, Brexit, political uncertainty, terrorism, weak economy, strong dollar and on and on. And somehow U.S. stocks are at all-time highs. 

This begs the question: How is anyone supposed to invest their money to make any money now?

Maybe it’s time for investors and savers to consider alternatives outside of the traditional assets like stocks and bonds. Some alternatives to traditional investing can be quite safe. Others can be quite risky, or they can bring many complications.

Here 24/7 Wall St. outlines 10 alternative investing strategies in which the public can invest in most economic conditions. Others may seem more like jobs than investments. What should be considered here is that not all alternative investing strategies are appropriate for every investor.

Let’s just assume that you need an extra $40,000 income per year on top of your retirement or social security income. Or let’s just say you are a tinkerer more than a career person. That would make cash flow and/or income extremely important. If you already have millions of dollars, then longer-term growth and value may matter more than needing income today. Every form of alternative investing comes with risks. Whether it is Wall Street or Main Street, the reality about money and investing is that there is just no such thing as a free lunch.

While Treasuries and CDs were named, we are also not including bonds from corporations, federal agencies, states and municipalities as alternatives. Those are of course alternatives, but they are quite common ones and they will be featured another time.

Also included here are at least some of the pitfalls and risks that must be considered in each individual asset class. One theme that will be evident here is the timing and liquidity of an asset. You can buy or sell stocks or most bonds in a few seconds with limited effort, but you can spend years or have to pay penalties or fees to exit many alternative investments.

Here are 10 alternative investment strategies for the public.

1. Property and Real Estate

Have you ever heard of the notion that they are not making any more land? More or less, that is true. Investing in all forms of land or real estate has helped make many millionaires and billionaires. Some land investors also would never dream of buying stocks or bonds because they have done so well. Whether you are a landlord for a house, apartment or business, the goals are generally to get ongoing income and having your tenants pay off the mortgage or note through time. Outside of traditional land, there is also timberland, farming, hunting leases and many other uses.

Cons on land and real estate need to weighed. First and foremost, you generally have to already have a lot of money to buy most land and real estate. Land and real estate can be rather illiquid and can take years to sell. They can also sit vacant or unimproved for many years. Land owners also have to pay property taxes and often have to pay for improvements or maintenance, or they need to keep insurance, all of which can add up quickly and over time.

2. Annuities

If you want to get as wide of a range of reactions as you can imagine, go ask people who invest money or who have assets what they think about annuities. Generally speaking, annuities are supposed to be relatively safe cash flow payments made annually. They also may be used for asset protection strategies, and that may fall way outside of just looking for gains or income. Annuities come in many styles, ranging from immediate to deferred, and they can be fixed annuities or variable annuities — with many variations in each. Investors often use annuities to help with cash flow needs, and they are often more than willing to sacrifice upside for the assurances and safety of principal.

The risks of annuities are numerous, and this will only scratch the surface. There can still be issuer credit risk, like default. There are limits to how much an annuity is insured for, generally considered to be $250,000 or $300,000. There can be and often are suitability issues. Some annuities can have such high fees and commissions that they look like they were built just for salespeople who enjoy high commissions. Other investors think annuities are just there to rip off unsuspecting investors. Many people do not fully understand annuities, even those who purchased them. If they have annuities with index ties, they often feel left out if the market rises 20% and they make only 5%.

3. Private Companies and Operating Businesses

Millions of Americans own small businesses. Most tend to be in services, but they can be manufacturing businesses as well. There are many business brokers out there, but many businesses get bought and sold directly via friends or family. The point is that you can own one private company or many private companies. You can own a gas station, convenience store, small hotel, lawn or pool care service, car wash, widget manufacturing company, book-keeping and records-keeping company, and on and on. Many people who buy private companies prefer to buy a franchise because it is proven, has a turnkey plan and hopefully can be sold down the road easier than most companies. These also can be considered “cash cows” because they kick off so much income to the owners.

The risks of investing in private companies and other operating companies are numerous. They may take years to sell again or they might never be able to be sold. Another pitfall is that sometimes (or always) you will have to be the proprietor in charge of running that business each day. Many businesses also have a lot of ties to the founder or prior owner, so someone else coming along later (that may be you!) might not have the ease of running and dealing with customers as would have normally been the case. Then there is the risk of people (labor) and operating costs, all of which can rise handily ahead. Paperwork, taxes and regulation often scare off what might have otherwise been passive business owners.

4. Art and Collectibles

Chances are pretty high that you heard of millions of dollars being spent on Picasso and Van Gogh paintings. Rare antiques and artifacts can sell for huge amounts. Ditto for the famed Honus Wagner baseball card that is so scarce and so sought after. What about the first Superman comic book, or what about manuscripts and autographs? Then there are stamps and rare coins to consider. All these fall under the arts and collectibles, and they are generally bought and sold by people who already have lots of money.

One of the biggest risks of art and collectibles is that beauty is in the eye of the beholder, and if you own it you may have been willing to pay more than anyone else at that time. Art and collectibles can be illiquid. Many unknowing investors also have been duped by fakes, replicas and forgeries sold as “the real deal on the cheap.” Knowing the pedigree is important as well — if it is stolen or if someone was swindled out of it, they might come after you for it. Collectibles as an asset class also generally are taxed at a higher 28% rate for the profit upon the sale.

5. Royalty Income Streams

Many individuals own streams of royalty income. In modern days, people might immediately think of royalty payments tied to oil and gas. The reality is that there are many royalties that can be invested in. You can invest in royalty payments tied to gold mining, music, patents or copyright, or even in films and TV. Some investors have even bought royalties tied to clothing lines. Another new royalty stream investment that is available is investing in the rights to future income of athletes. There are exchanges and venues for people to buy and sell royalties.

Perhaps it sounds great owning royalties. They can be very lucrative, but they can also be duds. Many athletes, musicians, brands, oil wells and the like simply fizzle out or die. Some royalties often just suffer from a slack economy, or the future sales do not live up to expectations. Another risk is that there can be legal disputes over what were the real sales or the real income levels that were as the base for royalties.

6. Gold and Silver

The price of gold and silver has risen sharply through time, and it often falls faster than it rose. Still, gold has a history that goes back for thousands of years. The shiny yellow metal has been sought after since the dawn of time. Gold is also a key holding of central banks, and probably every wealthy person in the world has been told repeatedly that they have to own some gold. It easily can be bought and sold now in the financial markets, online or at gold exchange stores. Some gold bugs invest in gold as a future store of value, or because they fear a coming collapse of the monetary system. There are too many reasons to say why someone might own gold. This is the same issue for silver, with even more variations.

Gold does come with risks that you might not normally think about. The numerous reasons people own gold actually make up some of the risks. Industry and technology keep finding new replacements that are far cheaper than gold. When gold gets too expensive, they use less gold in making jewelry. Gold (and silver) will never pay a dividend, and you can’t eat gold if you get hungry or drink it if you get thirsty. Gold and silver also get taxed at the same rate as collectibles, so you generally have to pay 28% on your profits. If the rationale behind gold buying was for barter, whoever is bartering with you may not value that gold very highly or they may bilk you. Then there is the risk of theft or loss.

7. General Stuff: Garage Sales and Estate Sales

It might not seem realistic that people could just drive to garage sales and estate sales to make an investment. Reality is different. Many sellers just want to get rid of family “stuff and junk,” but quite often there are major scores because people do not know what they are selling. This is where people can buy furniture, collectibles, clothes, art and just about anything else in a house at prices that can sometimes be at pennies on the dollar. If you ask antique store owners how they find so many of their items that have been hidden away from the public, one of the sources of so much is via estate sales. You too can do this, and you can sell from your home via eBay, Amazon or Craig’s List. You can often sell those items to stores or dealers. The general term for this is now being a “picker” (just like the TV show “American Pickers”) and it can be quite profitable if you know what you are doing or get incredibly lucky.

There are many risks in buying from estate sales or garage sales. Someone down the road could claim that the item was stolen. If you are not paying close attention to what you buy and sell, you could be buying and selling something different from what you thought it was. There are also many fakes and replica items that get bought and sold, often without the buyer or seller ever knowing it. And back to beauty is in the eye of the beholder: you might think something is worth $1,000 when most people wouldn’t want it if you paid them to take it. There is also a risk that your buyer tries to back out or wants to return the item or dispute the transaction. No free lunch here.

8. Private Loans

Some shrewd people take the route of making private loans. These can be made to individuals or they can be made to a business. This can be quite lucrative, particularly if the loan is made to people or businesses that have ample assets or cash flow but with limited credit or bad credit history. You might also be make 8%, 10% or more, and in some cases you might even ask that the loan has a convertible feature or comes with an upside under certain circumstances.

There are risks in making private loans. First and foremost, you might have a hard time collecting interest and getting paid back your principal. Being a private lender also can damage relationships with friends or family. Collecting money from your kids or best friend is not fun, and it can create friction or even fights. Another risk is that if your business or friend runs into financial or tax problems ahead, the IRS or other creditors may demand that money as they had a higher standing in line. Another risk that lenders have to consider is when usury law comes into play. It could come with big fines (or worse).

9. Private Equity and Hedge Funds

Many wealthy Americans invest in hedge funds and private equity funds. These are expected to generate returns via income and gains through time. Many funds of this sort have very specific targets or asset classes, while others just look for opportunities regardless of where they are. Or the fund groups may just turn around and invest in stocks and bonds. Generally, except for long-only funds, hedge fund investors are looking for absolute returns, even if it is by profiting from downside. Private equity investors are usually looking for above-market returns through time or they are looking for income and/or long-term gains that are not correlated to the markets.

Even hedge funds and private equity funds managed by very sophisticated and smart investors come with risks. If investors want their money back, it can be locked up for months or years. If the money is paid back, future investors may demand claw backs so that you have to share your proceeds with a larger pool, like in the case of the Madoff scandal. Speaking of Madoff, it seems amazing or impossible but there are still many scams and financial shenanigans that can take place, between management fees, operating fees and net performance fees. Another risk in funds like these is that many investors do not even know how their money is being invested for quite some time.

10. Cash

Most investors forget that cash is an asset class in and of itself. It can be cash in the bank, it can be in a lock box or it can be cash in a money-market account at a brokerage firm. The phrase “cash is king” comes to mind, because you can spend it for what you need to buy or you can save it for a rainy day. Most rich people and those with wealth tend to have cash in an account or on hand — who wants to be called “cash poor” despite being wealthy? There are other alternatives now to just cash. You can hold foreign currencies, or you can even go the crypto-cash route like Bitcoin.

Cash is not immune from risk, and modern times have proven that in a new method. Cash’s value is what the value says it is on the face, but consumer prices fluctuate through time and inflation bites into cash’s relative value as well. The other side of the coin is that negative interest rates in much of the world mean that cash held in a bank account actually loses a small amount of money. Cash can be stolen, and cash is hard to claim as a loss because it is so hard to prove. Physical cash can also get lost, or it can be destroyed or burned. Again, good luck getting that back. - 247wallst.com

Opinion: These 10 ‘Laws of Wealth’ Can Help You Hold on to Investment Gains

Acting out of fear or greed is a sure way to leave money on the table!

Warren Buffett’s mentor Benjamin Graham famously said, “The investor’s chief problem — and even his worst enemy — is likely to be himself.”

Graham sure knew his subject. Consider: The 30-year annualized return for the S&P 500 SPX, average was 10.35% through 2015, but the average investor in the U.S. market pocketed just 3.66%, according to an analysis of investors by researcher Dalbar Inc.

How can you avoid leaving money on the table? The answer is to change your investing behavior so that you stick to a plan rather than act out of fear or greed. Most of the shortfall cited in the Dalbar study, in fact, was due to “panic selling, excessively exuberant buying and attempts at market timing.”

“The Laws of Wealth” is my attempt to curb this money-losing behavior. Here is an excerpt of the book’s 10 key guidelines to help you keep more of your investment gains:

1. In every market, you control what matters most

The highs and lows of the market may be out of your hands, but how you choose to behave is within your power, and is an important driver of returns.

2. Diversification means always having to say you’re sorry

Diversification is not a panacea, nor does it prevent your portfolio from falling, even dramatically, at times. What it does is protect you from idiosyncratic risk and losing your shirt on a concentrated bet. Buying a car with an airbag is a good idea, even if you never get in a wreck. Diversifying your portfolio is similarly wise, even if the benefits may not always be apparent.

3. Risk is not a squiggly line

Risk is not a paper loss. Risk is not underperforming your golf buddy. Risk is not even underperforming a market benchmark. Real risk is the probability of you permanently losing your money. Accordingly, investors with a long time horizon and diversified portfolios are taking on little risk compared to someone with a more concentrated, shorter time frame.

4. Forecasting is for weathermen

Famed contrarian investor David Dreman found that from 1973 to 1993, of the 78,695 corporate earnings estimates he examined, there was a one-in-170 chance that analysts’ projections would fall within plus or minus 5% of the actual number. The smartest people in the world don’t bother with the crystal ball. Said financier J.P. Morgan of the market’s future trajectory, “It will fluctuate.”

5. You cannot do this alone

Most people understandably assume that the greatest value offered by a financial adviser is, well, financial advice. Not so. Vanguard’s “Advisor’s Alpha” study shows that working with an adviser provides around three percentage points of outperformance, and that fully half of that value comes from behavioral coaching. Morningstar, Aon Hewitt, and Envestnet all have similar investor studies showing that hand holding is more important than stock picking when it comes to optimizing returns.

6. Excess is never permanent

John Neff, former head of Vanguard’s Windsor Fund, astutely noted that, “Every trend goes on forever, until it ends.” It has been said that nature abhors a vacuum and an investment corollary is that markets abhor excess. While short-term trends and emotionally fueled investors can push a stock up or down for a time, things tend to come back to Earth eventually. Betting that something will rise or fall in perpetuity is a risky bet.

7. Trouble is opportunity

Many investors are familiar with Buffett’s admonition to be “greedy when others are fearful and fearful when others are greedy,” yet so few of us manage to successfully view a downturn as the opportunity it truly is. There is true joy (and riches) to be had, so commit yourself to continue investing and even increasing your allocation when times are bad.

8. If it’s exciting, it’s probably a bad idea

Nobel laureate Paul Samuelson said it best, “Investing should be more like watching paint dry or watching grass grow.” Research shows that the average IPO in the U.S. has gone on to underperform the market benchmark by 21% per year in the first three years following its release. Emotion makes us a stranger to our rules, and straying from a discipline tends to end in disaster.

9. You are not special

Robert Shiller, a Nobel prize-winning economist, is fond of saying that “This time it’s different” is the most dangerous phrase in investing. While mania can carry a market for a time, the truth about what works long-term on Wall Street is pretty boring (think paying a fair price for a profitable company) and is unlikely to fundamentally change.

10. Your life is the best benchmark

Benchmarking to your own goals instead of arbitrary external ones has myriad benefits. First off, it personalizes the whole endeavor and makes investing about doing what you love instead of outperforming others. Research also shows that goals-based investors are more likely to stay the course during tough times and even save at higher rates, since what they are chasing is so personally meaningful. - marketwatch

Big Mac Index Shows Ringgit Undervalued by 61%

This article first appeared in The Edge Financial Daily, on July 25, 2016.

KUALA LUMPUR: Fancy a McDonald’s Big Mac? Good news.

McDonalds’s outlets in Malaysia offer the iconic fast food item at a discount of 60.6% compared to the US.

What does that mean? The ringgit is undervalued by 60.6%, according to The Economist’s Big Mac index.

The “patty purchasing parity” — with a tongue-in-cheek economic reference system devised by the magazine to compare the strength of currencies and even the size of economies — revolves around comparing the price of Big Macs in US dollar terms across countries.

For example, a Big Mac in the US costs US$5.04 (RM20.46) while a Big Mac in Malaysia costs US$1.99 (RM8).

“So Malaysia is offering a very good deal,” The Economist Asia Economics editor Simon Cox told The Edge Financial Daily in a phone interview.

However, according to the magazine, a more sophisticated version of the Big Mac index, which takes into account fundamentals, shows that the dollar is overvalued by a much smaller margin: roughly 11% on a trade-weighted basis.

While highlighting that the undervalued ringgit serves to cushion any impact from slower growth in China and across the globe, he said it has also served to undermine the interests of the Malaysian economy.

“It is a bad thing that economic conditions require a weaker ringgit, but given that Malaysia did need a weaker currency, it was a good thing that the currency was able to fall and was allowed to fall without any disruption,” he said.

“What has been interesting in Malaysia is that the ringgit has fallen a long way and going by the Big Mac index, it is quite competitive, quite cheap, but domestic inflation is still very well contained,” he added.

He said that it is not usual in the case for emerging markets, where a sharp fall in currency could result in skyrocketing inflation.

Cox credited Malaysia’s resilience in the face of a declining currency to Bank Negara Malaysia’s (BNM) policies to ensure that inflation would not rise and stay elevated above its targets for a long time.

He also said he does not foresee the ringgit to weaken further, despite BNM’s recent move to cut the overnight policy rate (OPR) by 25 basis points to 3%.

“Sentiment towards emerging markets has steadied after the alarmism of January and February,” he said.

“The 1MDB (1Malaysia Development Bhd) scandal may make it harder to spirit money out of the country, not harder to get money into it,” he added.

Cox said the Malaysian economy is also “faring surprisingly well”, despite news of the 1MDB scandal hitting international headlines.

He credits this to a well-diversified economy, which has a wide manufacturing base aside from commodities.

“I think one misconception about Malaysia among international observers is the idea that it is very commodity-dependent,” he said.

“But commodity exports are quite a small percentage of Malaysia’s total exports, it has got a much more diversified, stronger manufacturing base than people think.

“It is not as if it has been a great time for manufacturing either, but that does mean that Malaysia has been somewhat more resilient than emerging economies,” he added.

Cox said domestic demand has remained reasonably robust, but noted that indicators about the strength of domestic demand have been mixed, suggesting slowing of momentum in domestic demand.

He said BNM’s move to cut the OPR was meant to address this, as the Malaysian economy is now more dependent on domestic demand rather than exports in a time of slowing global economic growth.

“But broadly speaking, I think the cut was meant to forestall trouble rather than being a reaction to trouble, it is more pre-emptive than a reaction,” he added.

The Big Mac index shows that out of 43 countries, only three countries — Switzerland, Norway and Sweden — have currencies that are overvalued when compared to the US dollar, highlighting that the US dollar has climbed 56% above fair value on a trade weighted basis.

15 Retirement Investing Mistakes to Avoid

Stay on course, as the road to retirement success has potential potholes and distractions.

Plan well to reach milestones. (ISTOCKPHOTO)

The rules for preparing for retirement may be easy. Start saving early. Own stocks. Diversify globally. Rebalance your portfolio. Yet during times of market volatility, many investors get spooked and begin to question their investment strategies.

"I have seen investors destroy their retirement in the blink of an eye with one mistake," says Mark Matson, founder and CEO of Matson Money.

Especially given recent stock market volatility, it is important to prepare your mindset. Stocks go up and down, sometimes dramatically. But volatility is a natural part of investing, says Diane Pearson, a wealth advisor with Legend Financial Advisors.

"It is important to be able to stomach the short-term volatility and plan for long-term volatility," she says.

Here are 15 common ways investors trip themselves up on the road to retirement.

Ignoring the need to plan. Setting milestones is important. Investors cannot expect to reach their retirement goals without hitting some targets along the way, Pearson says.

Putting all your eggs in one basket. Diversification is an essential part of retirement planning. Markets are inherently volatile, which is actually where the returns come from, Matson says.

"Investors can manage volatility with portfolio diversification by taking a long-term view and not make short-term reactions," he says.

Forgetting to rebalance regularly. Down markets are opportunities where wealth is transferred from those who panic to those who keep their heads and buy low, Matson says.

Moving from equities to annuities. Many times investors will panic during market downturns and purchase products like fixed-index annuities thinking that they will receive a market rate of return with little to no risk, Matson says.

"In reality, they have made a very serious investing mistake that can have major consequences for their retirement. They have effectively sold when the market was low, locked in those losses, made their money illiquid for a lengthy period of time and given themselves a very poor probability to achieve a true market rate of return," Matson says.

"Guarantee can be one of the most costly words in investing."

Loading up on junk bonds. They aren't worth the risk, Matson says.

"Junk bonds historically have a very high default rate and have high risk compared to investment-grade bonds, and those defaults can skyrocket during turbulent times," he says. "In 2009, when many were doing the opposite of what they should have been doing and fleeing equities for 'safety,' the speculative grade default rate was 10 percent."

Keeping too much cash. Saving for retirement is important, but you also need to let your money grow.

"People haven't earned enough on their investments," Matson says. "Over the last 30 years, the average investor, according to Dalbar, has doubled their money roughly just one time versus four times by owning a globally diversified portfolio and rebalancing."

Not saving enough. Save at least 10 percent of your salary if you start in your 20s, says David L. Blain, chief executive officer at BlueSky Wealth Advisors.

"Bump that to 15 percent in your 30s, and if you haven't started by 40, you need to target 20 percent," Blain says. "Investing is not a way to make money, it's a way to grow your savings. Retirement is funded by your savings."

Having too much house in your portfolio. Putting too much money in the house can doom retirement, Blain says.

"People think putting money into a house payment is savings or an investment. A home is place to live, not an investment," he says. "Likewise, assuming they will sell their house to fund their retirement is a bad mistake. In some markets it may work, but it's a bad strategy."

Taking Social Security at age 62. "Unless you know you have a terminal disease or you literally have no other income, delay Social Security until full retirement – better yet, age 70," Blain says. "Despite fears of global calamity where the entire United States collapses, if you're retiring today, [Social Security] will be there in some form or fashion."

Keeping the default fund in your 401(k) plan. Take the time to do some research and understand your options and make a choice. If you're auto enrolled in your plan, sometimes the default fund is the cash option, Blain says.

Assuming your expenses will go down in retirement. Expenses generally don't decrease, Blain says. Plus, health care in retirement could be costly.

"Medicare isn't free. Many people assume their medical costs will be minimal when they get to 65," Blain says. "Medicare doesn't pay for long-term care. Make sure you do a good insurance checkup in your 50s to see what coverages you might need in that area."

Overestimating the return you will get from your portfolio. Over the next 10 to 15 years, an 8 to 10 percent annual return is not realistic, Blaine says. "A diversified portfolio for the intermediate term at best will be 4 to 6 percent," Blaine says.

Trying to time the market. When it comes to your long-term wealth, market timing can be very expensive, Matson says. "Studies show that if you miss just the 10 best performing days in the S&P 500 over the last 20 years, your nest egg gets cut in half. Half of your wealth gone by trying to time the market," Matson says.

Do-it-yourself retirement planning. "Going at this alone can be a very dangerous place, and I don't recommend it. My advice for investors is to hire a coach. A coach will help you navigate choppy markets, resist temptation, develop a game plan and stick to your stated investment philosophy for a lifetime," Matson says.

Using only company retirement accounts. Consider using the Roth IRA or Roth option on your 401(k), Blaine says. "Don't go into retirement with 100 percent of your money in a 401(k) or regular tax deferred IRA," he says. "Have some savings in a regular brokerage account. Diversify not only your investments but the type of investment accounts you use." - usnews

7 Global Goats That Could Bring Market Mayhem

Unwittingly or willingly, these international forces could turn Wall Street into a market menagerie.

How or whether these seven goats will impact Wall Street remains to be seen. Wall Street has always been an upside down place. China's GDP weighs $10.3 trillion -- second to the U.S. at $17 trillion -- and represents about 17 percent of the world's economy.


Meet the goat.

For as long as the bulls and bears have see-sawed back and forth in the zoo that is Wall Street, one stubborn animal sat on the fulcrum, ready to tip the balance in the bear's favor: the goat. When global forces show ornery, goat-like tendencies, markets in the U.S. get the willies. How or whether these seven goats will impact Wall Street remains to be seen. But each has the potential to turn 2016 or 2017 into the Year of the Goat. Never mind that in the Chinese zodiac, that symbolizes prosperity. Wall Street has always been an upside down place. And speaking of China ...

Chinese economic slowdown.

Like a fat-goat, 2-ton gorilla hybrid, China upsets U.S. markets with a single hiccup, as shown by Wall Street's "flash crash" last August. China's GDP weighs $10.3 trillion -- second to the U.S. at $17 trillion -- and represents about 17 percent of the world's economy. "China has a difficult balancing act," says Dan Kern, chief investment strategist for TFC Financial Management in Boston. "It's trying to stabilize growth while addressing structural problems such as poor credit allocation, an overleveraged corporate sector and 'zombie' companies that need to be restructured."

Japanese recession.

Optimists point to first quarter 2016 statistics that showed growth at 1.7 percent, well beyond the forecast 0.2 percent. Yet the world's third-largest economy has battled two recent recessions: one in 2014 and another short burst in November 2015. Then there's the nation's sales tax vexation. In 2014, it rose from 5 to 8 percent -- which triggered, yes, a recession -- and a jump to 10 percent was approved in October. But last month, Prime Minister Shinzo Abe delayed that second increase until October 2019.

Russian hackers.

The Corkow Trojan is not the latest John le Carre novel -- because it's true. Digital rogues unleashed the virus in February 2015 to attack Russia-based Energobank. The result: The ruble-dollar exchange rate shifted more than 15 percent in minutes. Though the hackers didn't cash in, their action indicates how cybersecurity remains a big issue. Corkow has wormed its way into more than 100 financial institutions and since it evades detection by constantly changing, no one knows whether the Russian hackers have grander schemes in mind.

The Brexit.

The most recent goat to invade Wall Street came clad in a Union Jack. One tycoon, Sir Richard Branson, is so worried he's calling for another exit referendum. Next up? Maybe a Scexit from the Brexit. Leaders in Scotland -- set against leaving the EU -- are mulling another independence vote. At the very least, "The instability from further job losses in Britain and the EU could risk the already fragile economies across southern Europe," says Bryan Slovon, founder and CEO of Stuart Financial Group in the Washington D.C. area.

A Grexit.

If all these EU portmanteaus are annoying, consider how EU leaders will feel if Greece makes a run for it. Its debt remains a sickening 175 percent of its GDP -- and constant scolding from Germany hasn't helped. Germany opposed another bailout of $8.3 billion last month, but the dough won't plug the leak. Greece's economy has shrunk by a quarter over the last eight years. Greek bonds speculators have already taken a hit, and a Grexit could prove the last domino before a rupture of the EU.

Italian economy.

Italy isn't at the same crisis stage as Greece, but signs aren't good for the world's eighth-largest economy. Bad bank debt and dubious balance sheets indicate a potential financial crisis. Meanwhile, Italy's staggering debt-GDP ratio of 132.7 percent is a record high. While eyewear giant Luxottica (ticker: LUX) and Fiat Chrysler (FCAU) are international, "They will remain highly correlated to the Italian equity market," says Tom Manning, CEO of F.L.Putnam Investment Management Co. One sort-of bright spot: Unemployment, while high, is down from January's 11.7 percent to 11.5 percent.

Terrorism in Iraq and Syria.

The Economist Intelligence Unit, in assessing the largest threats to world financial stability, places the "the rising threat of jihadi terrorism" at No. 6, and cites Iraq and Syria as hotbeds for Islamic State activity. The report's forecast is not for investors who are faint of heart: If terrorism escalates, "it would no doubt begin to dent consumer and business confidence, which in turn could threaten to end the five-year bull run on the U.S. and European stock markets." - money.usnews