Does it seem to many of you who are trying to invest or save some money, that only the rich get richer in the market? The reason that perception exists is because – candidly – it’s true. Historically, the U.S. stock market (S&P 500) has average just about 10%. The average investor’s return, however, is a measly 3.5%. This is due to return-killing behaviors such as human nature, emotion, fees, and taxes. Meanwhile, the average institutional investor – the “Smart Money” as Wall St. has always referred to major endowments, foundations, pension plans, and institutions – have returned 12.5% annually over the long haul. Why this ridiculous 9% performance gap? Are those endowments and foundations really “smarter” people as the name implies? No – the primary reason is that the Smart Money invests in a safer, more diversified manner than does the average investor. Thus, each of you can improve your investment performance by changing your investment approach to emulate what the Smart Money has always done.
Major institutional investors have consistently outperformed the “average investor” due to their understanding, access, and commitment to true diversification across multiple asset classes. In more simplified terms – they are not married to just the US stock market as most individual investors have been. The biggest problem that most of you face is not making money when times are good, it’s protecting that money when the market is bad. The wealthiest investors have always met this challenge by paying as much attention to the downside as they do to returns on the way up. The key is to have pieces/parts of your portfolio that are unrelated or have low correlations to the performance of the stock market. These alternative investments will protect against market downturns and better diversify your portfolio. In order to better position your current portfolio for the future and inject a “smart money” approach to your investment management, I recommend using one or more of these components, depending on the amount of money you have to invest:
• Real Estate – “Let every man divide his money into three parts: invest a third in land, a third in business, and a third let him keep in reserve.” -Talmud (Circa 400 B.C.) See – this is the oldest asset class in the book! Yet too many young investors, especially, do not look for ways to add real estate to their investment mix beyond home ownership. There are many other options for this important diversifier – including REITs (both traded and private), land deals, and syndicates.
• Cash & Bonds – as boring as these asset classes may seem, the Smart Money investors have always held these less exciting fixed income instruments in their portfolios – because when the stock market is down – it’s always nice to have that protection and income that cash & bonds have historically been able to provide.
• International Stocks – Take a quick look around your home – see anything with the name Nestle, Sony, Toyota, Nokia, Cadbury, or Michelin on it? The point being – there is literally a world of opportunity out there in terms of investments. Many of the world’s best companies are located outside the U.S., yet most investors have not figured out what their institutional counterparts have long since known – that international stock markets can provide key diversification and also return potential. Don’t make the same mistake – add Global investments to your portfolio.
• Hedge Funds – Wealthy investors have been able to retain capital during down markets for years through complex instruments such as derivates, equity collars, arbitrage trading, and other hedging strategies. I recommend a more fundamental approach to hedge funds – a diversified fund of funds strategy designed to provide equity returns with significantly less volatility. In simplest terms, the multi strategy approach is designed to squeeze out incremental returns from a variety of trading strategies, hedge against market loss, and produce attractive returns in both good and bad markets.
• Managed Futures – Just as your mutual fund managers trade stocks and bonds to deliver performance from the retail markets, a qualified Futures portfolio trades in a wide variety of Global marketplaces in order to deliver completely non-correlated investment returns. If possible, I recommended adding a manager in this important asset class to take advantage of such opportunistic areas as Interest Rates, Energy, Metals, Currencies, Agriculture, and Indices. The portfolio has the ability to perform in both up and down markets and has virtually no historical correlation to the broader stock and bond markets.
• Commodities – In my opinion, the optimal way to capitalize on the surging global demand for raw materials or “real assets” by such growing consumers as China and India is to simply “buy what they are buying.” In other words, instead of investing directly in expensive and perhaps financially flawed emerging stock markets, the more prudent approach to making money on these macro trends is to participate in the secular trend of dramatically rising prices in the global commodities markets. This can include energy, metals, agricultural products, timber, and other hard assets that trade actively in markets around the world.
By adding these components strategically to a portfolio, even the average investor can significantly reduce market risk and begin to experience the smoother ride that the Smart Money as always enjoyed.
Click to Comment | 
Comments (1)
