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The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Book Description

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.

Table of Contents

  1. Copyright
  2. List of Tables
  3. Acknowledgments
  4. Introduction
    1. A Travel Guide to Alternative Investments
    2. Modern Portfolio Theory
    3. The Good, the Flawed, the Bad, and the Ugly
  5. 1. The Good
    1. 1. Real Estate
      1. 1.1. Historical Returns and Risk: U.S. Real Estate, U.S. Equities, and International Equities
      2. 1.2. The Diversification Benefits of REITs
        1. 1.2.1. Benefits of Diversification: Sample Portfolios
      3. 1.3. Asset Location and Real Estate
      4. 1.4. Recommended Investment Vehicles
      5. 1.5. International Real Estate
        1. 1.5.1. DRW, RWX, and WPS
        2. 1.5.2. DFA International Real Estate Securities Portfolio
        3. 1.5.3. Tax Considerations
        4. 1.5.4. The Wrap-Up on International Reits
      6. 1.6. Your Home and the Asset Allocation Decision
        1. 1.6.1. Wrap-Up on the Home as an Investment
        2. 1.6.2. Wrap-Up on Direct Ownership
      7. 1.7. Summary
    2. 2. Inflation-Protected Securities
      1. 2.1. Real or Nominal Return Bonds: Which Are Riskier?
      2. 2.2. TIPS: Doing the Math
      3. 2.3. Correlations with Equities and Inflation
      4. 2.4. Inflation, Price, and Interest Rate Risk
        1. 2.4.1. Inflation Risk
        2. 2.4.2. Price Risk
        3. 2.4.3. Interest Rate Risk
      5. 2.5. TIPS: Pros and Cons
        1. 2.5.1. Pros
        2. 2.5.2. Cons
      6. 2.6. Allocating Between Real and Nominal Return Fixed-Income Assets
      7. 2.7. A Shifting Allocation Approach
        1. 2.7.1. Developing a Strategy
        2. 2.7.2. Implementation
      8. 2.8. A Shifting Maturity Strategy
      9. 2.9. I Bonds
      10. 2.10. Summary
    3. 3. Commodities
      1. 3.1. Correlation with Stocks, Bonds, and Inflation
      2. 3.2. Event Risk
      3. 3.3. A Risk-Reduction Tool
      4. 3.4. Portfolio Efficiency
      5. 3.5. Gaining Exposure to Commodities
        1. 3.5.1. Mutual Funds: QRAAX and PCRIX
        2. 3.5.2. Commodity-Related ETFs
        3. 3.5.3. Commodity-Related ETNs
        4. 3.5.4. CTAs
      6. 3.6. The Argument Against Investing in Commodity Producers
        1. 3.6.1. The Equities of Oil Producers
      7. 3.7. Implementation
      8. 3.8. Summary
    4. 4. International Equities
      1. 4.1. Emerging Market Equities
      2. 4.2. Correlations
      3. 4.3. Sample Portfolios
      4. 4.4. The Risks of Investing in Emerging Markets
      5. 4.5. Small-Cap and Value Stocks
        1. 4.5.1. Recommended Vehicles
      6. 4.6. Wrap-Up: Emerging Markets
      7. 4.7. International Small-Cap Stocks
        1. 4.7.1. Sample Portfolios
        2. 4.7.2. Recommended Vehicles
      8. 4.8. Summary
    5. 5. Fixed Annuities
      1. 5.1. How Long Do Payments Continue?
      2. 5.2. Determinants of Payment Size
      3. 5.3. The Benefits of Annuitization
      4. 5.4. Mortality Credits Make It Possible
      5. 5.5. When Annuities Can Be the Right Choice
      6. 5.6. Evidence from Academia
      7. 5.7. When to Purchase a Fixed Annuity
      8. 5.8. Inflation-Indexed Immediate Annuities
      9. 5.9. Summary
    6. 6. Stable-Value Funds
      1. 6.1. Unique Risk and Return Characteristics
      2. 6.2. Investment Portfolios
      3. 6.3. Risks
      4. 6.4. Costs
      5. 6.5. Restrictions
      6. 6.6. Returns Change Slowly Over Time
      7. 6.7. Cash Flows Can Affect Returns
      8. 6.8. Summary
  6. 2. The Flawed
    1. 7. High-Yield (Junk) Bonds
      1. 7.1. Explaining the Low Correlation
      2. 7.2. Is Higher Yield Worth Higher Risk?
      3. 7.3. The Importance of Equity Risk
        1. 7.3.1. Hybrid Securities and Asset Allocation
        2. 7.3.2. Evidence Supported by Theory
      4. 7.4. Do High-Yield Bonds Have a Role?
        1. 7.4.1. Illiquid Securities
        2. 7.4.2. Other Negative Characteristics
        3. 7.4.3. Distribution of Returns Matters
        4. 7.4.4. High-Yield Bonds and Efficient Frontier Models
        5. 7.4.5. Inflation Risk
        6. 7.4.6. Asset Location
      5. 7.5. The Need for Diversification
      6. 7.6. The Historical Evidence
        1. 7.6.1. Vanguard High-Yield Corporate Fund
      7. 7.7. More Efficient Alternatives
      8. 7.8. Summary
    2. 8. Private Equity (Venture Capital)
      1. 8.1. Origins
      2. 8.2. The Attraction
      3. 8.3. The Historical Evidence
      4. 8.4. Characteristics of Private Equity Returns
      5. 8.5. Venture Capital Versus Publicly Traded Securities
        1. 8.5.1. Inefficient Diversification
        2. 8.5.2. Bias in the Data
      6. 8.6. Perception Versus Reality
      7. 8.7. Private Equity's Role in a Portfolio
      8. 8.8. Nonmonetary Explanations for Private Equity Investing
      9. 8.9. Summary
    3. 9. Covered Calls
      1. 9.1. Taxes Matter
      2. 9.2. Transactions Costs
      3. 9.3. An Alternative Strategy
      4. 9.4. Summary
    4. 10. Socially Responsible Mutual Funds
      1. 10.1. Defining SRI
        1. 10.1.1. Rapid Growth
      2. 10.2. Does Socially Responsible Investing Come at a Price?
        1. 10.2.1. The "Price" of Principles
      3. 10.3. Summary
    5. 11. Precious Metals Equities
      1. 11.1. Risk
      2. 11.2. Returns
      3. 11.3. Correlations
      4. 11.4. The Hedging Value of PME
      5. 11.5. Positive Attributes of PME
      6. 11.6. Other Considerations
      7. 11.7. Implementing the Strategy
      8. 11.8. Summary
    6. 12. Preferred Stocks
      1. 12.1. Long Maturities
        1. 12.1.1. Risks and Rewards of Long Maturities
      2. 12.2. Call Risk
      3. 12.3. Credit Risk
      4. 12.4. Long Maturities and Call Risk
      5. 12.5. Dividend Suspension
      6. 12.6. Preferential Treatment for Corporate Buyers
      7. 12.7. Other Considerations
      8. 12.8. Tax Advantages
      9. 12.9. Summary
    7. 13. Convertible Bonds
      1. 13.1. The Realities of Convertible Bonds
      2. 13.2. Considerations
      3. 13.3. Shifting Asset Allocation
      4. 13.4. Asset Location
      5. 13.5. Complexity
      6. 13.6. Summary
    8. 14. Emerging Market Bonds
      1. 14.1. Risks
      2. 14.2. Returns
      3. 14.3. Correlations
      4. 14.4. Potential Positives
      5. 14.5. Additional Considerations
      6. 14.6. Summary
  7. 3. The Bad
    1. 15. Hedge Funds
      1. 15.1. Exclusive Nature
      2. 15.2. Why Hedge Funds Aren't Mutual Funds
      3. 15.3. Facts Versus Fantasies
      4. 15.4. Hedge Fund Risks
      5. 15.5. Wisdom and Experience, or Hope and Hype?
        1. 15.5.1. The Cost of Folly
        2. 15.5.2. How High an Alpha Does a Hedge Fund Need?
        3. 15.5.3. How Funds of Funds Increase Hurdles to Outperformance
        4. 15.5.4. The "Ill-Logic" of Hedge Funds
          1. 15.5.4.1. The Power of the EMH
      6. 15.6. Long-Term Capital Management
        1. 15.6.1. The Death of Genius
        2. 15.6.2. LTCM'S Downfall: The Tyranny of Market Efficiency
        3. 15.6.3. Risk Versus Uncertainty
        4. 15.6.4. Fooled by Randomness
      7. 15.7. Summary
    2. 16. Leveraged Buyouts
      1. 16.1. Summary
    3. 17. Variable Annuities
      1. 17.1. Deferred Variable Annuities
        1. 17.1.1. Tax-Deferred Growth of Earnings
        2. 17.1.2. The Life Insurance Component
        3. 17.1.3. Ability to Annuitize
        4. 17.1.4. Other Negative Features
        5. 17.1.5. Are VAs Really That Bad?
        6. 17.1.6. Sold or Bought?
        7. 17.1.7. The Art of Deception
      2. 17.2. Variable Immediate Annuities
        1. 17.2.1. How Payments Are Determined
        2. 17.2.2. The Purpose of Immediate Annuities
      3. 17.3. Possible Reasons to Buy a Variable Annuity
        1. 17.3.1. 1035 Exchanges
        2. 17.3.2. Other Considerations
      4. 17.4. Summary
  8. 4. The Ugly
    1. 18. Equity-Indexed Annuities
      1. 18.1. Caveat Emptor
      2. 18.2. Minimums That Aren't Minimums
      3. 18.3. Penalties for Early Withdrawal
      4. 18.4. Tax Inefficiency
      5. 18.5. Summary
    2. 19. Structured Investment Products
      1. 19.1. Mondo National Bank Principal Protection Notes: Product Features
      2. 19.2. More Efficient Alternatives
      3. 19.3. A Closer Look at Hypothetical FRATS
        1. 19.3.1. Why Such "Attractive" Terms?
        2. 19.3.2. More Efficient Alternatives
      4. 19.4. Being Careful Out There
      5. 19.5. Summary
    3. 20. Leveraged Funds
      1. 20.1. The Proof Is in the Pudding
      2. 20.2. Summary
  9. Final Thoughts
  10. Notes
    1. Introduction
    2. Chapter 1
    3. Chapter 2
    4. Chapter 3
    5. Chapter 4
    6. Chapter 5
    7. Chapter 6
    8. Chapter 7
    9. Chapter 8
    10. Chapter 9
    11. Chapter 10
    12. Chapter 11
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
    17. Chapter 17
    18. Chapter 18
    19. Chapter 19
  11. Glossary
  12. Recommended Reading
  13. Sources of Data
  14. About the Authors
  15. About Bloomberg