Why you should consider alternative investments

The secret behind Yale's great ROI

Kevin McNab //March 29, 2016//

Why you should consider alternative investments

The secret behind Yale's great ROI

Kevin McNab //March 29, 2016//

In Mebane T. Faber’s 2009 book, The Ivy Portfolio, he starts the book, “16.62 percent. That figure is the annualized return the Yale University endowment has returned per year between 1985 and 2008. To put that number into perspective, the S&P 500 Index returned 11.98 percent a year over the same time period in one of the greatest bull markets in U.S. history.”

So how did Yale University achieve this? Using alternative investments! Now that I have your attention, do alternative investments have a place in your portfolio?

What Are Alternative Investments?

Alternative investments are broadly defined as investments other than stocks and bonds. These may include commodities, real estate, hedge funds, private equity, real assets, and investments with strategies such as arbitrage and hedging. The benefits of alternative investments include potentially higher returns and greater portfolio diversification resulting from low correlation with other more common asset classes.

Availability

Institutional investors, hedge funds, wealthy investors, and large endowments have used alternative investments as a way to boost returns and diversification for years. Historically, these investments have only been available to the wealthy. They have also been fairly illiquid investments. With new technology and the growth of mutual funds, the popularity of Exchange Traded Funds (ETFs), and Exchange Traded Notes (ETNs), many alternative investments and strategies are now available to all investors. In addition, many alternatives are now liquid.

Buyer Beware

Before using alternative investments, it is important for investors to understand the risk, tax consequences, and which alternative investments help properly diversify their portfolio. A good rule of thumb for investors is to not use an investment unless you understand the strategy, underlying investment, and tax consequences. Unfortunately, many investors have found themselves with a tax mess or with unexpected losses in their portfolio due to an innocent mistake of choosing the wrong alternative investment. When it comes to investing, choice is great as long as the underlying investment is understood.

Many investors, both novice and professional, fail to take advantage of alternative investments. This is due to either the lack of understanding or lack of knowledge that they are available. Savvy Investors are starting to use alternative investments to complement their portfolio. So ask yourself – what’s my alternative?