Adding Alternative Investments to a Stock/Bond Portfolio
by Phil DeMuth and Charles Rotblut, CFA
Phil DeMuth is a registered investment advisor with Conservative Wealth Management LLC and co-author with Ben Stein of “The Little Book of Alternative Investments” (John Wiley & Sons, 2011). I recently spoke with Phil about ways investors can expand their portfolios beyond stocks and bonds.
Charles Rotblut, CFA
Share this article
Charles Rotblut (CR): In your book, you argue that the traditional allocation of 60% stocks and 40% bonds has some weaknesses. Can you briefly explain why you think that and what some of those weaknesses are?
Phil DeMuth (PD): While there’s a great deal to love about the classic 60/40 stock/bond portfolio, the principal downside we see with it is that really, almost all of the volatility comes from the stock side. Depending on what your starting and ending points are, anywhere from 85%–95% of the day-to-day fluctuations of the portfolio comes from stocks. And that means that a bad year for stocks is going to be bad for this portfolio, pretty much no matter how the bond market does. The bond market is almost irrelevant. It acts, for better or worse, like a stock portfolio. And with that comes the big problem, which is that when bad times hit, investor’s portfolios are down, and it’s typically a bad time for the economy in general: People’s jobs are looking tenuous, their spouses’ jobs are looking tenuous, credit is hard to come by, the value of their house is down—the roof all falls in at the same time.
This gave us the impetus to look for alternative investments that might provide a cushion, or have at least an alternative series of returns than we would get just from the stock side. Another way of saying this is: “2008.” The year 2008 really showcased the limitations of equities and of traditional ways of trying to diversify. We were trying to see what else is out there that might have helped. That brought us to alternatives.
To read more, please become an AAII member or CLICK HERE.
Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.