Is it time to change the way you slice your pie?

The recent volatility in the stock market brings challenges and opportunities to investors at every level. Whether you are a "DIY," managing your portfolio yourself, someone who trusts their wealth manager to guide them, or a trustee of a substantial fund, you are dealing with a fluctuating situation. No matter how the turbulence of financial markets may impact you, it might be time to reassess your allocation percentages.

Focus on logic, not emotion

Successful investment strategies run counter to our instincts as human beings. We are wired to do the wrong thing; studies show that most people will take a larger risk to avoid loss rather than experience a gain. We are more concerned about avoiding mistakes than achieving success. When human psychology and emotions affect our decision-making, the result may be knee-jerk reactions that blow up financial plans and your future quality of life.

Paralysis is not a plan

Even the most well-researched and carefully modeled plans should be evaluated and possibly rebalanced, especially when the S&P 500 Index is moving like a pendulum. Sitting tight and waiting things out can mean missing out on opportunities. Investors working with an experienced financial advisor can be at a distinct advantage over those trying to educate themselves about alternative assets and other ways to minimize losses.

Watch the winners

One way to research potential new investment strategies is to explore how the extremely wealthy invest. A recent article (Financial Samurai, 4/7/22) analyzed the $42B Yale Endowment allocation history. The institution's objectives may be similar to yours. They seek strong returns, regardless of market performance, and the knowledge that their investments will outlast them and provide for the next generations.  In some respects, endowments operate under significantly different conditions than individual investors. For example, endowments’ investment horizons are often considered limitless, whereas individual investors will retire and have a greater need to preserve assets. Also, the strategies employed in the management of alternative investments may accelerate the velocity of potential losses, which endowments may be in better position to absorb than individual investors with less money.

A seismic shift

The Yale Asset Allocation Breakdown for the fiscal year 2021 included a minimum allocation of 30% to market-insensitive assets -- cash and bonds (7.5%) and absolute return (23.5%) -- a type of investment strategy that aims to deliver a positive (‘absolute’) return to investors, regardless of whether markets are rising or falling, although a positive return is not guaranteed.  The university limits illiquid assets -- alternative investments such as Real Estate Investments Trusts (REITs) and oil and gas. – to 50% of the portfolio

Yale's diversification is extreme compared to the typical investor whose portfolio is mainly allocated to stocks and bonds. This level of diversification is a function of their size, access, experience, time horizon, and need for lower volatility and has shifted steadily over the past 25 years. A recent investor report states, "In 1990, over 70% of the Endowment was committed to U.S. stocks, bonds, and cash. Today domestic marketable securities account for less than 10% of the portfolio, while foreign equity, absolute return strategies, and real assets represent nearly nine-tenths. The heavy allocation to non-traditional asset classes stems from their return potential and diversifying power. Today's actual and target portfolios have significantly higher expected returns and lower volatility than the 1990 portfolio—returning 11.2% yearly with low correlation to domestic stock and bond markets."

Reallocation planning

Some of the most prominent financial experts manage Yale's Endowment fund. They are very experienced and understand long-term goals and risk tolerance. They are highly knowledgeable regarding the non-traditional or alternative asset classes that comprise most of the allocation breakdown. It is unlikely that no matter how much you know or can learn about these, you can re-allocate your portfolio with confidence. Does your wealth manager advise you regarding opportunities in alternative investment areas? Do they have a track record with them?

Due diligence on illiquid assets

Savvy investors understand that they pay the price for daily access to their funds. Alternative investments generally involve a lack of liquidity with the return scheduled for months or years in the future. They accept this because their net worth is such that they don't need immediate access, and they trust the advisor(s) offering the opportunity. Non-traditional asset classes can be confusing and dangerous if they aren't entirely understood or objectively evaluated.

Observe supply and demand

Non-traditional investments that instill the highest confidence are those that have a positive correlation to supply and demand. For example, investments that are involved with building warehouses and distribution centers for e-commerce have benefitted from increased demand since the COVID pandemic.

Take a good look at your pie and call me if you want to slice it differently.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.

 Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity.

 Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

 The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.