We have just had a decade of growth, especially in the United States. Traditionally, if you do business with a financial advisor at a banking institution or a brokerage firm, you probably have a balanced portfolio of stocks and bonds to varying degrees depending on your risk tolerance. Is the use of traditional assets still appropriate for doing this? This will be followed by an introduction to alternative investments, the typical portfolio of North American wealthy people, and a possible option for you to achieve the desired returns in future years, while considering the risk tolerance specific to each investor.
The traditional wallet
Ah that famous 60% equity, 40% bonds. In time, these two asset classes combined together would reduce the volatility of a portfolio because they were not very correlated, that is, they did not react in the same way depending on the economic context or news. What can we expect as a return on such a portfolio for years to come?
At first, let’s look at the equity part. In a previous blog, I mentioned that the expected return on a portfolio of mainly US stocks for the next ten years would be almost zero if trends remain. Here is an update issued by the GMO-7 group. Note that rate of success of this group in predicting the future trend is of the order of 97%. As of March 31 2019, the expected return on US equities for the next 7 years could be negative and, in the expectation of a positive return, it would be necessary to move towards international equities. Moreover, even the bond portion should provide a near-zero return over the same 7-year period. In fact, if you look more closely at the performance of the last 40 years of US 10-year bond, we see that the yield has declined significantly, yielding a meagre 2.5% over the last decade. With a likely drop in future rates south of our border, what will be the return on this asset class?
Finally, some economists predict that there is a risk of a recession in the United States, a situation that could occur in 6 to 12 months. The likelihood that the US Central Bank will lower the key rate at least once this year is more than 95%.
Most managers agree that the current US equity market is expensive and that the risk is increased. As expected, returns from traditional assets appear low for the coming years, alternative products can be used to increase portfolio diversification as these products generally have a low correlation with traditional assets. But what is an alternative product?
Alternative investments are defined as anything that does not fall into the category of traditional investments. It includes real estate; personal or public, hedge funds, venture capital, options or others. It is a very broad universe and the quality of the products as well as the approach of use can vary greatly. Very large pension funds are the biggest users of alternative products to improve the diversification of their portfolio, which should result in better returns for a given level of risk.
Tiger 21 started about 19 years ago. Six entrepreneurs from New York who sold their business initially started it. The group has grown to include more than 640 members who discuss legal issues, family matters, philanthropy and how to invest their nest egg. The members of this group are regularly questioned to share the distribution of their portfolio.
The asset allocation of high net worth members of the group is as shown in the figure above. A little over a quarter of the portfolio is invested in real estate (other than personal residence and second homes), about a quarter of the portfolio consists of public shares listed on the stock market, another quarter in so-called private investment (non-public). and the balance containing bonds, liquidity and hedge funds. In summary, more than 50% of the assets held by members are distributed in alternative investments.
Where to find returns?
As discussed above, and if the forecasts materialize again, it seems clear that traditional assets will not deliver the desired returns in the coming years. Are there alternatives that can satisfy the investor? I think so.
I have my Exempt Market Products broker license, in the province of Quebec and Ontario, with the possibility of extending it to other provinces. The exempt market is also known as private placements. I can offer you these products individually, at retail, or in portfolio management, with the possible goal in the short or medium term to obtain a diversification that could resemble that of the members of the Tiger 21 group. Personally, I aim for my clients return in the range of 8% to 12%, with opportunities to invest in growth assets that, although more speculative, could yield returns even higher than those mentioned, always considering the risk tolerance of each investor.
As you can see, we have bonds that can earn you 10% per year and, in some cases, profit participation at maturity. The next newsletter will deal in particular with one of these bonds, Agrotech Ventures, a product still available for a remaining capital of less than 300K. We have private real estate products and alternative products that can complement your portfolio.
Hoping to have the opportunity to provide you with the returns you greatly deserve. Remember that the return is just as important as the capital invested in order to obtain the wealth required for your desired standard of living considering that you could live up to 100 years or more.
Blouin, Geneviève, Altervest, juin 2017, Comment utiliser l’investissement alternatif pour diversifier son portefeuille ;
Legault-Frenette, Alexandre, Altervest, juin 2019, Revisiting conventional wisdom: the famous 60/40 allocation;
Tiger 21 philosophy, November 2018, Learn from your (very wealthy) peers
Tiger 21, Q3 Asset allocation report;
GMO, March 2019, 7 year asset class real return forecast;
Blumenthal, Steve, On my radar, infolettre hebdomadaire.