There may be no easy answers when it comes to investing but there’s often one, if not two, asset classes which stand out as obvious investment choices at any point in time because they’re relatively cheap or offer an attractive yield. But right now that is just not the case.
In today’s low return, high risk environment, nothing stands out.
The sensible thing for investors to do right now is to diversify intelligently and make more, smaller bets while taking care to avoid losing money.
Unfortunately, there’s no free lunch, not that there ever was.
Investors also need to understand that there’s value in holding cash. While cash is currently a poor investment and not earning a real return due to record low interest rates, cash is a call option when everything is expensive.
It provides the opportunity to buy cheap assets when they become available in the future. Below are four important considerations for advisers.
1. Review your investment objectives and strategy
Now is an opportune time for advisers to re-examine a client’s investment goals and objectives, how much risk they can tolerate and how much they’re prepared to invest because they need to take on risk to generate returns.
In a perfect world, investors who take on higher risk should be rewarded with higher returns; but we don’t live in a perfect world. Therefore, investors need to understand that returns won’t be as high as they’ve historically been and adjust their expectations accordingly.
2. Avoid the losers
A common investment mistake is to follow the herd and chase last year’s winner, however, the popular expression: “past performance is no indication of future performance” is true.
Investing in the top performing asset class of the past five years is a poor strategy because it’s unlikely to be the winner of the next five years. Simply look at tech stocks in the years leading up to 2000 or listed property leading up to the GFC.
3. Get comfortable with alternatives
When returns are hard to come by in traditional asset classes, it’s time to consider alternatives.
Having said that, the majority of asset classes labelled “alternative” by the funds management industry really aren’t alternative at all. Genuine alternatives worth considering include managed futures, market neutral strategies, alternative beta strategies, merger arbitrage strategies and short volatility strategies.
These sorts of strategies, due to their esoteric nature, generally come at a higher price than more traditional strategies – but they can provide excellent diversification benefits in a portfolio.
4. Consider taking on illiquidity risk
Investors with surplus cash who don’t need to access their capital for the next seven to 10 years should consider taking on some illiquidity risk. That isn’t a green light to buy residential property in Sydney and Melbourne at overinflated prices, but it may mean looking at attractive commercial property opportunities (though it is rare to find good quality commercial property in the retail investor space).
Bear in mind, it’s valuable to hold some cash in reserve for the reasons mentioned above.
The trick will be finding the right balance. There are a number of property and private equity offerings that are run by very capable and experienced managers, with a long track record of generating consistent positive returns for their clients.
