The typical investment portfolio of the Main Street investor features a heavy allocation of stocks and bonds with alternatives sprinkled in for diversification.
The 60/40 mix (60% stocks/40% bonds) has been a long-standing favorite of financial advisors because of its simplicity and purported diversification benefits.
The problem with the stock/bonds mix is it may have been a good idea in the ’80s when treasury rates hovered around 10% but now with the 10-year Treasury yield under 1.0%, the diversification strategy using bonds to compensate for drops in the stock market doesn’t make sense.
What about alternatives?
The alternatives thrown into the 60/40 mix aren’t truly alternatives. To me, alternatives are investments that are alternatives to Wall Street and are available only through the private markets.
The alternatives touted by Wall Street are public investments incorporating alternative trading strategies including the use of derivatives and sophisticated trading strategies to beat the market and to hedge against market drops.
According to Wall Street, investing in public hedge funds that incorporate alternative trading strategies is considered diversification when thrown into the stocks/bonds mix.
The problem with public alternatives like hedge funds is that hedge funds rarely beat the market and derivatives are still correlated to Wall Street. With managers receiving 2% off the top annually, you can see why investors are often left in the cold.
What’s my investment portfolio like? My investment portfolio is heavily allocated to alternatives – true alternatives – with one or two stocks thrown into the mix. Why do I say true alternatives? My friends and colleagues think I’m crazy for allocating so heavily to alternatives. They think I’m reckless for investing in high-risk assets. Whenever the discussion comes up, I turn the tables on them and do the asking.
“Why do you allocate so heavily to stocks and bonds?” The most common answer? Everybody does. I press them further. “Why do YOU invest in stocks and bonds?” Another common response is “‘Because it’s where the big money’s made. How else are you going to invest in the Facebooks and Amazons of the world? Little do they realize that they’ll fail 99% of the time before landing on a Facebook or Amazon.
Unable to give me a straight answer on why they invest in stocks, I proceed to explain to them why I invest in alternatives. I explain to them that the alternative investments I prefer to offer three principal benefits: 1) cash flow, 2) appreciation, and 3) intrinsic value backed by tangible assets.
So why do I shun stocks and bonds? Here’s a brief discussion of stocks, bonds, and the alternatives my portfolio is allocated to along with a brief discussion of why I’m going to avoid or acquire a particular asset for 2021.
I have never been attracted to stocks because there’s no certainty in stock investments. The only way I make money with stocks is if I get lucky and guess the way a stock price is headed before everyone else does.
I’ve never been good at games of chance and investing in the stock market is little more than gambling to me. Besides, there are too many extraneous factors that have nothing to do with underlying financial metrics that influence a stock price. Someone says something wrong on Twitter – setting off a selloff – and the value of my holdings are sunk. This is not what I want to hang my fortunes on.
For 2021, I won’t go near the stock market. It is way overvalued. As of today, the Dow’s price to earnings (P/E) ratio sits at 30. The Dow’s historical P/E ratio is just below 16. That is almost double. Experts are clamoring about a crash and I have no reason to believe it won’t happen.
The current yield on a 10-year treasury note? .919%. The average inflation rate over the past 20 years? 3.1%. Case closed.
My friends are right and wrong about alternatives being risky. Most alternatives are but in the right hands, they can also be less risky than public equities while offering higher returns.
Here are the assets in my portfolio:
Cash flowing real assets have consistently and reliably appreciated over time – providing solid, consistent returns uncorrelated to Wall Street. Unlike stocks, real assets are illiquid – shielding the price and value of the assets from irrational investors.
Real assets have intrinsic value – value independent of what the mobs are willing to pay for them. This value comes from rental income.
I like real assets because no matter the economic environment, people will always need shelter and a place to work.
Oil & Gas
Consumers will always need fuel for transportation and to keep their houses warm. Like real assets, oil & gas interests have an intrinsic value from income generated from the sale of energy products. Rooted in real assets, oil & gas interests appreciate over time and are backed by a hard asset – providing added security to an investment.
There are two types of private equity, one type involving leverage buyouts and the other involving investments in private businesses. I’m more interested in the latter with a particular interest in viable businesses generating consistent cash flow.
Why do I like private equity? Because I can talk to the managers. The transparency of private equity allows me to thoroughly conduct due diligence on an investment opportunity, the underlying company, and the company’s managers to mitigate my risks and to ensure my investment objectives line up with those of the company’s.
Private equity can be ultra-risky but the mitigating factor is management. In the right hands, private equity can offer above-market returns at less risk.
For 2021 I’m allocating heavily to cash-flowing tangible assets that offer growth and appreciation. There are always segments within the various asset classes (i..e, real assets, private equity) that are recession-resistant – with some even thriving during a downturn. Cash-flowing alternatives offer me certainty and consistency – two things Wall Street can not.
A diversified portfolio of alternatives ensures consistent cash flow – even in a downturn as performing assets compensate for underperforming ones.
That’s why I’m shunning stocks and bonds for 2021 and running to alternative assets.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.