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Alternative investing strategies

By Barbara Whelehan ·
Friday, May 18, 2012
Posted: 6 pm ET

Are you wary of dealing with market volatility using conventional investing strategies? Investment advisers are wary too, and they're turning to alternatives, according to a new study by Natixis Global Asset Management, which runs $748 billion of assets.

A majority of the advisers surveyed (63 percent) question the value of long-term buy-and-hold strategies, and more than three-quarters (77 percent) say their clients question it as well.

Among the traditional strategies that advisers are shunning is the 60/40 mix of stocks and bonds that make up a balanced portfolio.

Turbulent times call for different measures?

In a SmartMoney article this week, Brett Arends looks at the 60/40 portfolio and finds flaws in the notion that it performs well over time. Such a standard portfolio is supposed to provide 8 percent gains a year on average, if you look back at the past 90-odd years. But in that period, most of the gains came in two periods, Arends says: "during the 1950s and in the past 30 years." Meanwhile, there were long stretches of time when investors got zilch after inflation -- between 1937 and 1950 and from 1965 to 1982.

After several months of climbing indefatigably for little apparent reason, the market's been in a funk lately. And there's no telling if this is just the beginning of another major downdraft. But everything is still pricey. One of Arends' sources recommends spreading assets among four overvalued sectors: stocks, Treasury Inflation-Protected Securities, long-term Treasuries and commodities. "At least investing in four expensive assets instead of two may help your odds," says Arends.

With retirement workplace plans, a lot of employees don't have these fund options available to them. Even if they did, it's not clear that investing in open-end mutual funds that invest in these asset classes would be such a great idea.

What's wrong with open-end funds?

In his semieponymous book, "In Short: Successful Investing During Turbulent Times," Larry Short, an investment adviser with DundeeWealth-DWM Securities in Canada, explains that with open-end mutual funds, there's a problem when investors flee all at once. Under these conditions, fund managers are forced to sell depressed securities in order to meet redemptions, which hurts investors who stick around. Short recommends using closed-end funds or exchange-traded funds, or ETFs -- also generally not widely available in the 401(k) plan lineup.

As for how to invest in turbulent markets, he offers a few solutions.

"My favorite is called the 'contrarian' approach," he says. "We recognize that the stock market moves from one crisis to another, with each crisis separated by a period of relative calm. Most investors -- on the advice of their advisers -- buy during the periods of calm when it is 'safe' to do so and sell during the next crisis. We advocate that investors buy during the crisis and sell when the crisis is over."

It's a market-timing strategy that Short admits, "is incredibly difficult to do. And we strongly caution investors not to do this unless they go through the lessons in the book."

His book, self-published through iUniverse, could use editorial refinement, but the cosmetic flaws are overshadowed by Short's ability to convey numerous valuable lessons in simple terms that investors could benefit from. It's enlightening to see things from the point of view of someone with 24 years' experience as an adviser, and his views are contrary to those of many of his peers, I suspect.

A second way to invest amidst turbulence involves employing a tactical asset allocation strategy with a sell discipline. Diversify among ETFs and after the market rises, take some money off the table.

Short's third solution is to buy stocks when they're super cheap, Warren Buffett-style. And while most workplace retirement plans don't let you buy stocks, you certainly have the freedom to do so in an individual retirement account.

But don't implement these strategies without reading Short's book, he warns. Doing so might produce undesirable side effects. He says he has met investors who tried his contrarian method of investing, "and they ended up with loss of sleep, migraines and asthma."


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