Alts Are Bad, M'kay

I thought of that title when I read a remarkably unrigorous take down of alternatives at Humble Dollar.

There are so many alts that do so many things, some of which are in fact intended to be riskier that this is just a silly lens to view the space. There are countless alts that are intended to be far less volatile than the market and others that are volatile such that when blended with asset types that meet the author's definition of a suitable investment will improve risk adjusted results. 

It might seem like we spend a lot of time here looking at a lot of different types of alts and how to use them in a portfolio. But actually, I think it might be the opposite. We spend a lot of time looking at alts that don't actually make the cut, in my opinion anyway. We dissect, dig in and try to figure out why they might be a no-go. For my money there a decent number that I think can add value but far more that don't.

Here are a couple of simplistic ways with decently long track records to use alts to improve risk adjusted results and actually, nominal returns too. 

First, I figured something new on Portfoliovisualizer, to name the portfolios with what they hold which might make the posts a little cleaner to read. BTAL is a client and personal holding. Both alt-heavy portfolios have better growth with lower standard deviation than plain vanilla 60/40 for nine years. 

When I say nothing can always be the best performer, I mean it and that is portrayed below. Assuming the author is ok indexing a 60/40 portfolio with VBAIX, if that is a valid way to invest then so too are the concepts underlying the other two portfolios.

I say concepts because although I am not going to put 25% into BTAL, the concept of allocating to several items with a negative correlation is valid, we've shown that countless ways going back to when the blog got more into portfolio theory. I'm not going to put 50% into QGMIX, I don't use that fund anywhere, but allocating to several items with all-weather attributes is valid, we've shown that countless ways going back to when the blog got more into portfolio theory.

The alts that are riskiest, in my opinion, are the ones that don't live up to the expectations set by the fund provider which is in part why we spend so much time on there here. That and it is interesting. I think that description applies to quite a few funds from Simplify for example. Alts lend themselves to behavioral mistakes too when people put too much faith into an alternative strategy. Any of these can have a terrible stretch...same as stocks or bonds. QGMIX' track record is impressive but that doesn't mean something catastrophic can't happen. A catastrophe happening to a 50% holding is a whole other thing than a catastrophe to 5-10% holding. But a behavioral mistake is not the fault of the fund. 

You as an end user, if you don't believe in alts don't use them, that's easy. But someone who is providing content for others in hopes of helping them become more knowledgeable investors, maybe do a little more work. Jack Bogle had the chops for this stance, the author at Humble Dollar does not. 

 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.