Three tips, which we all learned in kindergarten, could help advisers navigate the turbulent 2016 investing waters.
After an arduous 2015, plagued by disappointing returns and roller-coaster markets, many financial advisers hoped the new year would bring renewed promise of investor-friendly markets. Now, some sevens months into the new year, 2016 is starting to look a lot like 2015.
China's economic challenges, continued strain on oil, dismal broad markets performance and general global apathy have put returns under pressure and financial advisers on the defensive.
Even hedge funds, once the alternative investment go-to for non-correlated market returns, are only performing about half as well as the broad markets (as of June), leaving many advisers at a loss for what to do next. Remember George Orwell's often-repeated line from Animal Farm (1945), “All animals are equal, but some animals are more equal than others.”? It could just as easily be attributed to alternative investments. Hedge funds are just one component of the alts universe, and not all alternative investments are equal.
The following three tips, which we all learned in kindergarten, could help advisers navigate the turbulent 2016 investing waters.
STOP
With such dismal traditional and alternative investment performance, many advisers and their clients have been “institutionalized" into thinking that annual returns of 5% and beyond are a thing of the past. I would urge you to stop this thinking and, instead, rethink alternatives. In 2015 many “nontraditional" alternatives performed well over 5%, and, based on current metrics, they're on track to do so again this year.
While returns will always be a key indicator of investment success, there are other significant factors to discuss with your clients. These additional factors are particularly important if your clients are retired or are about to be so, and are looking for a regular income stream to help mitigate principal drawdown. Simply put, just because an alternative investment meets the client's return criteria does not mean it's necessarily the best fit for that particular client. Establish parameters with a client early on to ensure that you're setting the right expectation for what's to follow.
DROP
Younger investors are still likely to want high-risk, high-reward investments, since they have time to spare for a correction if returns are disappointing well into the future. But for older clients, length of commitment to an asset class or specific investment is often cause for concern. When you're in retirement, or close to, the last thing you want to do is hitch your wagon to a lame horse. For these types of clients, look for alternative investments that are highly liquid and don't have long (or any) lockups. That way, they can drop the asset for any reason, with hardly any notice. Several alternatives, like bridge loan funds, require only a one-year commitment.
ROLL
In the hunt for assets that generate meaningful returns and are free of long lockups, investors often neglect transparency. Product clarity, however, is absolutely imperative when you're dealing with someone's hard-earned investment capital. Luckily, investor and regulatory concerns have compelled alternatives to become much more accountable than in years past. As these products are increasingly clear in their offerings, be sure to require this of your alternatives.
Dayne Roseman is managing director at Woodbridge Wealth in Sherman Oaks, California
