A Gem -- "The Only Guide to Alternative Investments&

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A Gem -- "The Only Guide to Alternative Investments&

Postby Taylor Larimore » Mon Dec 01, 2008 11:46 pm

Hi Bogleheads:

Diehards Larry Swedroe and Jared Kizer have written "The Only Guide to Alternative Investments You'll Ever Need" in which they describe popular investment products and categorize them into good, flawed, bad and ugly. They tell us how to place the best of these product into our portfolios.

These are a few of the book's "Investment Gems":

"Some investment products are so complex in design that it is very difficult, if not impossible, for the average investor to fully understand the risks entailed and the costs incurred."

"Having the discipline to stay on course is essential when it comes to implementing an investment strategy."

"Sophisticated investors know that they should never make an investment without a full investigation of the risks and potential benefits."

"Over this thirty-year time period (1978-2007), U.S. REITs earned higher returns than both U.S. and international stocks."

"When considering an asset class for inclusion in a portfolio, -- investors need to consider the diversification benefit of the investment."

"Diversification has been called the only free lunch in investing."

"If one chooses to own REITs, they should be the first investments placed in tax-deferred or tax-exempt accounts."

"Recency is the tendency to give too much weight to recent experience, while ignoring the lessons of long-term historical evidence."

"The evidence from academic studies demonstrates that equity REITs, both domestic and international, offer an attractive risk/return trade-off" and provide meaningful diversification benefits to portfolios."

"Investors seeking to add real estate to their portfolio should consider an allocation of between 5 and 15 percent of the equity portion of the portfolio."

"Although the U.S. Treasury has only been issuing inflation-protected securities since 1997, other countries have been doing so since 1945, which gives us a substantial amount of data."

"TIPS are great equity and fixed-income diversification instruments."

"TIPS have provided their highest returns when equities have produced poor returns."

"TIPS, in general, should be held in tax-advantaged accounts."

"It is important for investors to develop a disciplined strategy so that they are not reacting to the noise of the market."

"The bottom line is that investors should consider devoting at least some significant portion of their fixed-income allocation to inflation-protected securities."

"Commodities can reward the patient and disciplined investor."

"When adding a small allocation of an asset with negative correlation to a portfolio, high volatility can be a good thing."

"Only informed and disciplined investors should consider including commodities in their portfolio."

"The logic of diversifying economic and political risks is why investors should consider allocating at least 30%, and as much as 50%, of their equity holding to international equities."

"Modern portfolio theory tells us that sometimes we can add risky assets to a portfolio and actually reduce the risk of the overall portfolio."

"The tried and true investments with the greatest long-term success are often downright boring!"

"A fixed annuity is not an investment vehicle. The issuer of the contract, the insurance company, is taking the investment risks."

"The decision to purchase an immediate annuity is a decision to insure against longevity risk."

"For a healthy couple, both of whom are sixty-five, there is a 50% chance that one will live beyond the age of ninety-two."

"Unless they are highly risk-averse, investors should probably not buy an immediate fixed annuity until approaching age eighty."

"Despite its low correlation with other portfolio assets, high-yield debt provides almost no unique benefit in terms of portfolio diversification."

"In times of crisis, the markets for illiquid assets can virtually dry up."

"For most investors the only way to obtain sufficient diversification of the risks of investing in speculative securities is through a mutual fund."

"Investors should never confuse yield with returns."

Within the broad category of private equity are three major subcategories: venture capital, leveraged buyouts (LBOs); and mezzanine financing."

"Returns alone are an insufficient reason for considering any investment."

"After ten years the survival rate of private firms was only about 34%." (2002 study)

"Private equity investors forgo the benefits of liquidity, transparency, broad diversification, and the access to daily pricing that mutual fund investors enjoy."

"Understanding the difficulty of identifying superior hedge-fund, venture-capital, and leveraged-buyout investments leads to the conclusion that hurdles for casual investors stand insurmountably high."

"For investors who value the attributes of a covered-call strategy, there is a more efficient way of achieving the same objective."

"Our capitalist system excels at responding to the growing demand for customized approaches to investing."

"Passive investors pay a price of about 0.5% per year when investing in socially responsible broad-market index funds."

"William Bernstein estimated that for the period from 1942 through 1996, the annualized return for precious metals equities (PME) was about 9.5%. During the same time period, the S&P 500 Index returned 14.0%."

"All things considered, we cannot identify a compelling reason to include PMEs in a well-diversified portfolio."

"While preferred stocks offer relatively high yields, in general, they possess enough negative attributes to make them inappropriate choices for individual investors."

"Risk and expected return are always related."

"One of the rules of prudent investing is to avoid complex securities because the complexity is likely to favor the issuer."

"Low correlation is only a necessary but insufficient condition for considering an investment."

"Holding convertible bonds in a mutual fund, or a separate account, causes a loss of control over the risks and expected return of the overall portfolio."

During the 2000-2002 bear market for equities, emerging market bonds proved to be one of the top-performing asset classes."

"The inclusion of emerging market bonds in a portfolio is not recommended."

"Past turnover of actively managed funds may not be a good predictor of future turnover."

"Most investors (of hedge funds) don't understand what they are buying or what they are paying."

"Hedge funds have failed to deliver on their promise of superior risk-adjusted returns."

"From January 1995 through March 2006, the average hedge fund returned 8.98% per year, lagging the S&P 500 by 2.6% per year." (2006 study)

"Less than 25% of the hedge funds in existence in 1996 were still alive in 2004."

"When investors look at the performance of hedge funds, they need to be aware that the data are likely to be misleading."

"The Efficient Market Theory is practically alone among theories in that it becomes more powerful when people discover serious inconsistencies between it and the real world." (Lee/Verbrugge quote)

"Wall Street is a relatively small community with a highly efficient grapevine."

"One of the more common mistakes investors make is that they are fooled by randomness, confusing skill and luck."

"Hedge funds cause people to pay fees that would be considerd highway robbery in even the most wack-a-doo mutual fund." (Gary Weiss quote)

"The bottom line on hedge funds is this: They are 'sinkholes' for investors."

"In order to experience a good investment outcome, one does not need to purchase exotic instruments."

"Investors' objectives are best accomplished without being sidetracked by a leveraged buyout."

"Variable annuities are products that are sold, not bought."

"Variable annuities (VA) convert what would otherwise be long-term capital gains into ordinary income."

"While we don't recommend VAs, those who have decided to purchase one should only consider an annuity from a company that has the highest credit rating."

"The sales abuses related to VAs were taken to new heights with the creation of what the industry euphemistically calls 'bonus' annuities."

"Education, or a good fee-only advisor who is not influenced by commission-based compensation, can be the armor that protects investors."

"Fortunes are made on Wall Street by catering to your greed." (Gary Weiss quote)

"The following is a good rule of thumb: The larger the commission, the worse the investment."

"Equity indexed annuities are the poster children for products that are too good to be true."

"Wall Street's sales and marketing machine is continuously pumping out fairy tales--that rarely have happy endings.

"Many structured products torture investors with their fees in ways that would make the Inquisition proud"

"The overwhelming majority of individual investors aren't content to settle for market returns. Instead, they try to outperform the market through various methods such as stock picking, market timing, and fund selection. The unfortunate result for most investors has been below-benchmark returns."

Thank you Larry and Jared!

Link to more Investment Gems:

http://www.bogleheads.org/forum/viewtopic.php?t=881
"Simplicity is the master key to financial success." -- Jack Bogle
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Taylor Larimore
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Postby Asterix » Tue Dec 02, 2008 12:51 am

What a coincidence, I just got this one in the mail today :)
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