What’s the Deal with Alternative Investments?

Let’s be real. When people ask about “alternative investments,” what they’re actually saying is:

1. "I want returns in excess of what the stock market provides.", and/or
2. "I’d like an insurance policy against a market crash."

Let’s tackle the first one: returns.

It’s totally natural to want more returns. If you walk into any bookstore, you’ll find endless titles on the subject. But, if it were that easy, those authors would be on their yachts sipping 2015 Château Margaux, not duking it out for 557th place on Amazon’s bestseller list.

Boosting returns is hard. So, let’s take a page from Charlie Munger’s playbook and invert the problem. Instead of asking, “How do I increase my returns?” let’s first ask, “What’s guaranteed to hurt my returns?”

Interestingly—it’s not complicated: Fees, Taxes, and Mistakes.

When you introduce alternatives, you’re rolling out the red carpet to known return detractors:

1. The fees are higher (often way higher).
2. The taxes are higher (Alts prioritize returning capital, which brings forward tax).

And, you are increasing your exposure to potential mistakes:

1. Concentration risk (high weighting to individual positions).
2. Cash drag (sitting on cash as you wait for deployment opportunities).

In other words, alternatives are like throwing sand into the gears of return generation. You’re signing up for higher costs and more risk, all for the chance of a higher return. If you’re going to dive into alternatives, you better have high conviction that it’s worth it, because that risk/reward trade-off is no joke.

Let’s Talk About Insurance

Now, the “insurance” part—keeping your portfolio safe from a market crash. Here’s the secret: the best defense against a crash isn’t fancy. It’s just time. Extend your time horizon, and you’ll be okay.

Quick aside: One year, my globally diversified index fund portfolio went down in value because of a virus that shut down the global economy. I did... absolutely nothing and stopped looking at my accounts. In less than a year, I recovered all losses and started earning a positive return. The end.

Insurance is expensive, and while it might pay you emotional dividends, it rarely pays off economic ones.

Bottom Line

At the end of the day, we need to be honest with ourselves about what we’re optimizing for. Is it peace of mind? Is it better returns? Because here’s the kicker: in my experience, alternatives are often more about good marketing than good returns.

In most cases, buying and holding a low-cost index fund is the way to go. When we run financial projections, it’s rare that the stock market’s returns aren’t enough to meet people’s goals. So, why complicate things?

Sincerely,

Rob Townsend, CEO Camber Private Wealth

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