For years, the investment world consisted of stocks and bonds. Mutual funds and asset allocation arrived next. That's what the average investor knows about. But there are many other types of investments, things most people have never even heard of or at least never used. Some of those unfamiliar investments are the exact thing that people should learn about, embrace, and use in their portfolios.
So, I am not here to talk about mutual funds or even exchange-traded funds (ETFs). Instead, I want to give you some examples of investments that you may not even know about but that could ultimately help your portfolio. Keep in mind, all of these asset classes involve risk and you should understand that risk and if it is right for you. Here are five investments that could change your portfolio's outcome:
Non-public REITs. A REIT is a real estate investment trust, or a way to invest in various real estate properties under one entity. Non-public REITS do not rely on and are not impacted by changes in interest rates the way bonds are. With interest rates at rock bottom and getting ready to increase, the issue will be with bond prices. As rates go up, bond prices go down. However, everyone needs some level of fixed-income investment in their portfolios. A good alternative to bonds are non-public REITs. Typically, REITs invest in a certain type of real estate like commercial buildings. They have tenants in those buildings that have signed long-term leases. Those tenants will pay rent, and the REIT will pay you a certain dividend based on the receipt of those rents. The key here is to use REITS with low leverage, good quality buildings, and tenants with long-term leases.
Structured notes. Structured notes are like bonds, but you get to set your own terms. A good investment firm will have relationships with several investment bankers and be able to construct anything from a CD alternative note with guaranteed principle and high potential return, to one that could give you 200 percent of the upside of an index and only 10 percent downside. The key is that your investment manager gets to design it—the options are virtually limitless.
Long-short funds. Most mutual fund managers are required to invest at least 80 percent of assets into the type of stock outlined in their investment objective and prospectus. Unfortunately, when that asset class is down, so is your account. With a long-short fund, the manager is permitted to buy things he thinks will increase in value and hold them, which is called going long. He can also sell—or short—stocks he thinks will lose and make money when they decrease in value. This flexibility gives your manager the ability to make money in up and down markets.
Managed futures. Managed futures funds are like long-short funds for the futures market. They invest in things like oil, agricultural commodities, and currencies. They can be fairly complicated to understand but should have a place in most portfolios. The great thing about these investments is that they tend to be positive most of the time and can perform exceptionally well in very poor markets. For example, in 2008 when the U.S. market went down 37 percent, the managed futures index was positive by more than 17.5 percent. Better still, many of the best managed futures managers performed in the 30 to 40 percent range. Now that can help your portfolio.
Long-short bond funds. We've already talked about long-short funds. Now, think about those same funds for the bond market. Remember, when interest rates increase, bonds prices decrease. Imagine being able to take advantage of that decrease. That's what long-short bond funds do. Because these types of funds are newer to the market, today there are only two funds available. They can be a good asset class to consider for the next couple of years.
There are investments out there that you may not know about or understand. Some have just recently become available to the investing public. Knowing about these and being open to them may be the best thing you ever do for your portfolio.
Good luck and happy investing.
Kelly Campbell, CFP® and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.