How the 99% can invest like the 1%
3 portfolio moves for the moneyed that Main Street can make
Sure, the wealthy have more zeros in their accounts and access to top financial advice, but the sophisticated capital preservation, hedging and portfolio-diversification strategies once available only to the country-club set are now available to the country at large.
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Why financial planners are worth it
MarketWatch's Chuck Jaffe offers his advice on Markets Hub. (Photo: Bloomberg)
Moreover, nowadays you can get the investing equivalent of a chauffeur-driven Cadillac for the price of a Camry. Many specialized boutique firms have branched beyond their high-net-worth bread-and-butter and offer their expertise to the retail public through relatively inexpensive, easily traded mutual funds and exchange-traded funds.
“A lot of options are opening up for the ordinary investor to really take control,” said Kevin Cimring, co-founder of Jemstep, an online investment-advice provider.” It puts them in a position that is closer to the advice wealthy investors take advantage of.”
Actually, rich investors are different in two important respects that ordinary investors can learn from: knowledge and strength. Their portfolio decisions typically are better-informed and they have sufficient diversification to hang tough in rough markets.
High-net-worth investors “understand the trade-off between risk and return,” said Kurt Silberstein, managing director of alternative investments at Ascent Private Capital Management, a division of U.S. Bank. “They have staying power and conviction in their investments.”
Risk and reward
Investing like those protected by deeper pockets can be risky, but blending a small amount of exotic holdings with traditional core holdings of stocks, bonds and cash in fact lowers a portfolio’s volatility, because alternative assets don’t move in lock-step with stocks and bonds. They’re even independent of precious metals, commodities and currencies.
In this way, investors get a smoother ride down Wall Street over time, and a cushion from the uncertainty of the U.S. “fiscal cliff,” euro-zone woes or whatever geopolitical challenges face the world.
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“Look beyond stocks and bonds, and see what other options are available to enhance portfolio return,” said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Mich. “That’s where these types of strategies can come into play.”
Just realize that alternative investments won’t necessarily keep pace with stocks in runaway years such as this, where the Standard & Poor’s 500-stock index SPX -0.0075% has gained around 18% so far. By comparison, for example, long-short equity mutual funds, which in addition to capturing upside also try to profit when stock prices fall, are up just 5%, according to investment researcher Morningstar Inc.
How do you fit alternative investments into your portfolio? For starters, if you have a financial adviser, learn about the types of assets being considered and how their characteristics could affect your portfolio, said William Koehler, CEO of Tower Wealth Managers in Prairie Village, Kan. And ask about cost. Some products come with high price tags; you can certainly find quality “mainstream” alternatives at a reasonable price.
“Most retail investors don’t need these more esoteric products,” especially ones that use leverage, said King Lip, chief investment officer at Baker Ave, an investment manager in San Francisco. “Capital preservation is the key. The rich have come to that conclusion and are staying diversified, protecting the downside; you don’t need to take a lot of risk to have investment success.”
