The Only Guide to Alternative Investments You'll Ever Need E-Book

Larry E. Swedroe

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg
• Sprache: Englisch

Seitenzahl: 441

Veröffentlichungsjahr: 2010

Beschreibung

The rewards of carefully chosen alternative investments can be great. But many investors don't know enough about unfamiliar investments to make wise choices. For that reason, financial advisers Larry Swedroe and Jared Kizer designed this book to bring investors up to speed on the twenty most popular alternative investments: Real estate, Inflation-protected securities, Commodities, International equities, Fixed annuities, Stable-value funds, High-yield (junk) bonds, Private equity (venture capital), Covered calls, Socially responsible mutual funds, Precious metals equities, Preferred stocks, Convertible bonds, Emerging market bonds, Hedge funds, Leveraged buyouts, Variable annuities, Equity-indexed annuities, Structured investment products, Leveraged funds The authors describe how the investments work, the pros and cons of each, which to consider, which to avoid, and how to get started. Swedroe and Kizer evaluate each investment in terms of: * Expected returns * Volatility * Distribution of returns * Diversification potential * Fees * Trading and operating expenses * Liquidity * Tax efficiency * Account location * Role in an asset-allocation program Any investor who is considering or just curious about investment opportunities outside the traditional world of stocks, bonds, and bank certificates of deposit would be well-advised to read this book.

Leseprobe

Table of Contents

Praise

Other titles from BLOOMBERG PRESS

Title Page

Copyright Page

Dedication

List of Tables

Acknowledgements

Introduction

A TRAVEL GUIDE TO ALTERNATIVE INVESTMENTS

MODERN PORTFOLIO THEORY

THE GOOD, THE FLAWED, THE BAD, AND THE UGLY

PART 1 - The Good

Chapter 1 - Real Estate

HISTORICAL RETURNS AND RISK: U.S. REAL ESTATE, U.S. EQUITIES, AND INTERNATIONAL EQUITIES

THE DIVERSIFICATION BENEFITS OF REITS

ASSET LOCATION AND REAL ESTATE

RECOMMENDED INVESTMENT VEHICLES

INTERNATIONAL REAL ESTATE

YOUR HOME AND THE ASSET ALLOCATION DECISION

SUMMARY

Chapter 2 - Inflation-Protected Securities

REAL OR NOMINAL RETURN BONDS: WHICH ARE RISKIER?

TIPS: DOING THE MATH

CORRELATIONS WITH EQUITIES AND INFLATION

INFLATION, PRICE, AND INTEREST RATE RISK

TIPS: PROS AND CONS

ALLOCATING BETWEEN REAL AND NOMINAL RETURN FIXED-INCOME ASSETS

A SHIFTING ALLOCATION APPROACH

A SHIFTING MATURITY STRATEGY

I BONDS

SUMMARY

Chapter 3 - Commodities

CORRELATION WITH STOCKS, BONDS, AND INFLATION

EVENT RISK

A RISK-REDUCTION TOOL

PORTFOLIO EFFICIENCY

GAINING EXPOSURE TO COMMODITIES

THE ARGUMENT AGAINST INVESTING IN COMMODITY PRODUCERS

IMPLEMENTATION

SUMMARY

Chapter 4 - International Equities

EMERGING MARKET EQUITIES

CORRELATIONS

SAMPLE PORTFOLIOS

THE RISKS OF INVESTING IN EMERGING MARKETS

SMALL-CAP AND VALUE STOCKS

WRAP-UP: EMERGING MARKETS

INTERNATIONAL SMALL-CAP STOCKS

SUMMARY

Chapter 5 - Fixed Annuities

HOW LONG DO PAYMENTS CONTINUE?

DETERMINANTS OF PAYMENT SIZE

THE BENEFITS OF ANNUITIZATION

MORTALITY CREDITS MAKE IT POSSIBLE

WHEN ANNUITIES CAN BE THE RIGHT CHOICE

EVIDENCE FROM ACADEMIA

WHEN TO PURCHASE A FIXED ANNUITY

INFLATION-INDEXED IMMEDIATE ANNUITIES

SUMMARY

Chapter 6 - Stable-Value Funds

UNIQUE RISK AND RETURN CHARACTERISTICS

INVESTMENT PORTFOLIOS

RISKS

COSTS

RESTRICTIONS

RETURNS CHANGE SLOWLY OVER TIME

CASH FLOWS CAN AFFECT RETURNS

SUMMARY

PART 2 - The Flawed

Chapter 7 - High-Yield (Junk) Bonds

EXPLAINING THE LOW CORRELATION

IS HIGHER YIELD WORTH HIGHER RISK?

THE IMPORTANCE OF EQUITY RISK

DO HIGH-YIELD BONDS HAVE A ROLE?

THE NEED FOR DIVERSIFICATION

THE HISTORICAL EVIDENCE

MORE EFFICIENT ALTERNATIVES

SUMMARY

Chapter 8 - Private Equity (Venture Capital)

ORIGINS

THE ATTRACTION

THE HISTORICAL EVIDENCE

CHARACTERISTICS OF PRIVATE EQUITY RETURNS

VENTURE CAPITAL VERSUS PUBLICLY TRADED SECURITIES

PERCEPTION VERSUS REALITY

PRIVATE EQUITY’S ROLE IN A PORTFOLIO

NONMONETARY EXPLANATIONS FOR PRIVATE EQUITY INVESTING

SUMMARY

Chapter 9 - Covered Calls

TAXES MATTER

TRANSACTIONS COSTS

AN ALTERNATIVE STRATEGY

SUMMARY

Chapter 10 - Socially Responsible Mutual Funds

DEFINING SRI

DOES SOCIALLY RESPONSIBLE INVESTING COME AT A PRICE?

SUMMARY

Chapter 11 - Precious Metals Equities

RISK

RETURNS

CORRELATIONS

THE HEDGING VALUE OF PME

POSITIVE ATTRIBUTES OF PME

OTHER CONSIDERATIONS

IMPLEMENTING THE STRATEGY

SUMMARY

Chapter 12 - Preferred Stocks

LONG MATURITIES

CALL RISK

CREDIT RISK

LONG MATURITIES AND CALL RISK

DIVIDEND SUSPENSION

PREFERENTIAL TREATMENT FOR CORPORATE BUYERS

OTHER CONSIDERATIONS

TAX ADVANTAGES

SUMMARY

Chapter 13 - Convertible Bonds

THE REALITIES OF CONVERTIBLE BONDS

CONSIDERATIONS

SHIFTING ASSET ALLOCATION

ASSET LOCATION

COMPLEXITY

SUMMARY

Chapter 14 - Emerging Market Bonds

RISKS

RETURNS

CORRELATIONS

POTENTIAL POSITIVES

ADDITIONAL CONSIDERATIONS

SUMMARY

PART 3 - The Bad

Chapter 15 - Hedge Funds

EXCLUSIVE NATURE

WHY HEDGE FUNDS AREN’T MUTUAL FUNDS

FACTS VERSUS FANTASIES

HEDGE FUND RISKS

WISDOM AND EXPERIENCE, OR HOPE AND HYPE?

LONG-TERM CAPITAL MANAGEMENT

SUMMARY

Chapter 16 - Leveraged Buyouts

SUMMARY

Chapter 17 - Variable Annuities

DEFERRED VARIABLE ANNUITIES

VARIABLE IMMEDIATE ANNUITIES

POSSIBLE REASONS TO BUY A VARIABLE ANNUITY

SUMMARY

PART 4 - The Ugly

Chapter 18 - Equity-Indexed Annuities

CAVEAT EMPTOR

MINIMUMS THAT AREN’T MINIMUMS

PENALTIES FOR EARLY WITHDRAWAL

TAX INEFFICIENCY

SUMMARY

Chapter 19 - Structured Investment Products

MONDO NATIONAL BANK PRINCIPAL PROTECTION NOTES: PRODUCT FEATURES

MORE EFFICIENT ALTERNATIVES

A CLOSER LOOK AT HYPOTHETICAL FRATS

BEING CAREFUL OUT THERE

SUMMARY

Chapter 20 - Leveraged Funds

THE PROOF IS IN THE PUDDING

SUMMARY

Final Thoughts

Notes

Glossary

Recommended Reading

Sources of Data

Index

About the Authors

About Bloomberg

List of Tables

Table 1.1 Investment Efficiency, U.S. Stocks, International Stocks, and REITs, 1978-2007

Table 1.2 Correlation of Annual Returns

Table 1.3 Diversification Benefits of REITs, 1978-2007

Table 2.1 Decision Table for Allocation of Short-Term Fixed-Income and of 10-Year TIPS or a TIPS Fund

Table 2.2 Decision Table for the Allocation and Maturity of TIPS

Table 3.1 Returns and Volatility: Commodities, Stocks, and Bonds, 1973-2007

Table 3.2 Major Asset Classes: Annual Correlation with the S&P GSCI, 1973-2007

Table 3.3 Correlations of Commodities Futures Returns with Stocks, Bonds, and Inflation, July 1959-December 2004

Table 3.4 S&P 500 and S&P GSCI: Returns Correlated with the Business Cycle

Table 3.5 Returns and Volatility of Stocks, Bonds, and the S&P GSCI, 1980-1989

Table 3.6 Years of Negative Returns of Lehman Brothers Treasury Bond Index (1-30 years), 1973-2007

Table 3.7 Years of Negative Returns of the S&P 500, 1973-2007

Table 3.8 Sample Portfolios: DJ-AIGCI and S&P GSCI, 1991-2007

Table 3.9 Oil Stocks: Betas and Correlations with Equities and Oil Prices, 1990-2000

Table 4.1 Comparative Performance: Emerging Markets, Emerging Market Small-Cap, and Emerging Market Value, 1989-2007

Table 4.2 Sample Portfolios, 1988-2007

Table 4.3 Comparative P/E Ratios

Table 4.4 Comparing Large-Cap, Small-Cap, and Value Emerging Market

Table 4.5 Performance: S&P 500, MSCI EAFE, and International Small-Cap Stocks, 1970-2007

Table 4.6 Sample Portfolios: International Small-Cap Allocations, 1970-2007

Table 4.7 Sample Portfolios: Risk and Return, 1988-2007

Table 5.1 Annuity Payout Compared to Treasury Bond Payout

Table 5.2 Likelihood of Outliving Investable Assets

Table 7.1 Credit Ratings for Standard & Poor’s and Moody’s

Table 7.2 Has Credit Risk Been Rewarded?

Table 7.3 Annualized Returns and Standard Deviations for Alternative Strategies, 1979-2007

Table 9.1 Comparing Alternative Portfolio Strategies, 1973-2007

Table 11.1 Years of Negative Returns for the S&P 500 Index (1970 to 2007)

Table 12.1 Alternative Portfolio Strategies 1973-2007

Table 14.1 Emerging Market Bond Returns, 1994-2007

Table 14.2 An Overview of Emerging Market Bond Funds

Table 15.1 Comparing the Return of Hedge Funds to the Returns of Publicly Traded Securities, 2003-2007

Table 15.2 Alpha Required by Hedge Funds Versus the Market

Table 15.3 Alpha Required by Hedge Funds Versus the Market

Table 17.1 Impact of Investment Returns on Annuity Payments

Table 19.1 More Effective Alternative Portfolios, 1970-2006

Table 19.2 More Effective Alternative Portfolios, 1970-2006

Table 20.1 It’s a Long Way from Strategy to Outcome!

Table 20.2 Volatility Matters

Praise for

The Only Guide to Alternative Investments You’ll Ever Need

The Good, the Flawed, the Bad, and the Ugly

BY LARRY E. SWEDROE AND JARED KIZER

“A timely and valuable book. The authors describe twenty alternatives to investing in traditional U.S. stocks and bonds, and how they work. They tell you which ones to walk away from, which to consider (carefully!), and how to get involved. These are good-sense judgments that every investor should pay attention to.”

—JANE BRYANT QUINN Author of Smart and Simple Financial Strategies for Busy People

“At the risk of being clichéd, Swedroe has done it again! I make it a point to read every book written by him. This time, it’s all about alternative investments, and Swedroe, running true to form, tells it exactly as it is. He pulls no punches, he holds nothing back. If he doesn’t like something, he says so. If emerging markets equities are downright risky, he doesn’t mince his words or try to put a puffy spin on it. That is what makes reading Swedroe so fascinating.”

—STUART KAHAN Executive editor, CPA Wealth Provider

“For investors looking to go beyond an S&P 500 Index fund and a bond fund—and every investor should—don’t make a move until you’ve read The Only Guide to Alternative Investments You’ll Ever Need. Full of historical evidence, practical advice, and specific investment ideas, this book provides a blueprint for what to include and what to avoid in an intelligently constructed portfolio.”

—ROBERT BROKAMP Editor, The Motley Fool’s Rule Your Retirement service

“As a financial journalist, I’ve been recommending Larry Swedroe’s books for years because they are filled with invaluable advice that can make any reader a more successful investor. I will now be adding The Only Guide to Alternative Investments You’ll Ever Need to my favored reading list.”

—LYNN O’SHAUGHNESSY Financial journalist and author, The College Solution

“Larry Swedroe and Jared Kizer have written a different sort of investment book, and one that has been sorely needed: a comprehensive guide to the theory, peer-reviewed literature, and practical nitty-gritty of actually deploying portfolio assets. It is a gold mine for even the most experienced of practitioners, and a vital lifeline for small investors. This volume is destined to become the most marked and Postit-noted tome on the average investment shelf.”

—WILLIAM BERNSTEIN Author of The Intelligent Asset Allocator and The Four Pillars of Investing

“What’s missing in your library? Larry’s new Alternative Investments! You’ve already got tons of books on stocks, bonds, and funds. The OnlyGuide to Alternative Investments You’ll Ever Need is all about the future of investing, the new stuff that’ll give you an edge in the twenty-first century. An absolute must-read!”

—PAUL B. FARRELL, JD, PHD Columnist, DowJones-MarketWatch Author of The Millionaire Code, The Winning Portfolio, and The Lazy Person’s Guideto Investing

“Swedroe and Kizer provide a thorough analysis of the pros and cons of each alternative investment. They recommend ‘good’ alternatives to add to a diversified portfolio of high-grade bonds and stocks. Perhaps more important, they warn investors about the dangers of truly ‘bad’ and ‘ugly’ alternatives.”

—DR. WILLIAM REICHENSTEIN, CFA Pat and Thomas R. Powers Chair in Investment Management Hankamer School of Business Baylor University

“Swedroe and Kizer have sorted through the clutter and confusion of alternative investments to provide the authoritative voice on these much hyped and frequently misunderstood financial products. Kudos to them for sharing their wisdom in a manner that can be easily understood by all.”

—BILL SCHULTHEIS Author, The Coffeehouse Investor

“What a great service this book is to the investing community! As investors reach out for higher returns, many will venture into the higher-risk category known as alternative investments. For those who are so tempted, this book provides an invaluable guide.”

—EDWARD R. WOLFE, PHD Professor of Finance and Director of the Financial Planning Program Western Kentucky University

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This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

© 2008 by Larry E. Swedroe and Jared Kizer. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022, or send an e-mail to [email protected].

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This publication contains the authors’ opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the authors, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the authors, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader.

Library of Congress Cataloging-in-Publication Data

Swedroe, Larry E.

The only guide to alternative investments you’ll ever need : the good, the flawed, the bad, and the ugly / Larry E. Swedroe, Jared Kizer.

p. cm.

Includes bibliographical references and index.

Summary: “Investors are actively seeking investment options other than equities, bonds, and cash that will provide diversification and improved returns. The book offers an overview of a wide range of alternative investments, explaining what each is and how it works. The author shares his opinions on which to seriously consider and which to avoid at all costs”—Provided by publisher.

ISBN 978-1-57660-310-9 (alk. paper)

1. Portfolio management. 2. Asset allocation. 3. Investment analysis. 4. Investments. I. Kizer, Jared. II. Title.

HG4529.5.S936 2008

332.63—dc22

2008032685

This book is dedicated to the memory of Rubin Hersch. He was a sweet, kind, and sensitive man who enriched the lives of all those he touched.

Acknowledgments

NO BOOK IS ever the work of one person, or, as in this case, two people. This book is no exception. We would like to thank the principals at Buckingham Asset Management and BAM Advisor Services for their support and encouragement: Susan Shackelford-Davis, Paul Forman, Steve Funk, Bob Gellman, Ed Goldberg, Joe Hempen, Ken Katzif, Mont Levy, Steve Lourie, Vladimir Masek, Bert Schweizer III, and Stuart Zimmerman.

We also thank Steve Nothum for his help with the data. Laura Latragna and David Ressner both made major editorial contributions. We also thank RC Balaban for his tireless efforts at fact checking. Any errors are certainly our own.

We also thank Sam Fleischman, our agent, for all of his efforts.

We would be remiss if we did not thank Stephen Isaacs, editorial director of Bloomberg Press, for his faith in the book and for his ongoing support. We also thank our development editors, Janet Coleman and, especially, Erica Levy Klein, for their assistance. They both made invaluable contributions.

Larry adds the following: I would like to especially thank the love of my life, my wife, Mona, for her tremendous support and understanding for the lost weekends and many nights that I sat at the computer well into the early morning hours. She has always provided whatever support was needed, and then some. Walking through life with her has truly been a gracious experience.

Jared adds the following: Like Larry, I would first like to thank my wife Lezlie for her support during our seven wonderful years of marriage. Without her support, I would certainly not be where I am today. I would also like to thank all the fellow practitioners (including Larry) and academicians who have taken time out of their busy schedules to answer my questions on investment theory and personal finance. Without them, I would never have become as well versed in both subjects as I am today.

Introduction

THE SEARCH FOR better performing assets usually leads investors to explore the broad category of alternative investments, which is a term generally used to describe investments outside of the familiar categories of equities; Treasury bonds; other high-quality, investment-grade debt; and bank instruments such as certificates of deposit. Greater numbers of people embark on this quest during periods when the performances of more familiar investments are lackluster. The 2000-2002 bear market in equities, for example, inspired many investors to investigate alternative investments. Similarly, the 2003 collapse of short-term interest rates to 1 percent and the 2005 drop in Treasury bond rates to below 4.2 percent led investors to look for higher-yielding fixed-income investments. And now, the huge federal budget and trade deficits and the impending crises in Social Security and Medicaid have sent investors searching for investments that will protect them from the risks of a falling U.S. dollar.