Alternatives? JPM Has The (Data) Goods

The Idea Farm shared JP Morgan's most recent Guide To Alternatives and there's plenty to chew on. 

They have the real yield on a 60/40 portfolio as being negative. There's a strong tax-efficiency argument for why yield is not the optimal way to take income from a portfolio but people do love yield all the same. Where more and more high yielding products bundle ROC into their distributions, there can be instances where much of the payment is not taxable as ordinary income. The cost basis goes down with ROC distributions so when the high yielding product is sold, the capital gains tax might be bigger. If the crazy high yielder of your choice erodes down to a dollar or the like, maybe you never need to sell it though. No sale, no tax? Ask your CPA.

Of course in IRA/Roth/HSA accounts this isn't a tax issue. We look at plenty of ways to get higher yields than the Agg, often with less volatility but spreading out the risk is very important. 

Let's have some fun with this one;

You can see which allocations we're playing with here. All three alt portfolios are the same in terms of splitting the fixed income between SHRIX and client holding BKLN and for the alt I just used QSPIX. Trying to tease out the yields here, 60/40 yielded 2.22% for the period studied, 40/60 yielded 2.39%, 30/50/20 yielded 5.44%, 50/30/20 yielded 4.63% and 60/20/20 yielded 4.22% while inflation ran at 3.44%. Testfol.io has more than half the total return for 30/50/20 coming from yield. 

The volatility numbers of what we built were a little higher than what JP Morgan came up with but so were the returns. Anyone interested in taking this sort of approach would need to diversify beyond the two fixed income holdings and one alternative. 

The next chart reiterates a point I've been making for 20 years. REITs are not good diversifiers. They fall prey to the heuristic that in a bear market, all correlations go to 1.

I'm not anti-REIT, they just shouldn't be counted on to help in bear markets.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.