Is Your Advisor Limiting Your Chances for True Diversification?

To meet your retirement goals, one rule of thumb is that your financial advisor should construct a portfolio that’s better diversified than one you could have created yourself. However, many advisors don’t, in large part because their investment knowledge is largely limited to stocks and bonds.

See: thumb, rule of

“In today’s volatile markets, you need to add alternative assets that both protect your downside and give you upside opportunity,” says Jerry Miccolis, CFP, CFA, Principal and Chief Investment Officer with Brinton Eaton, a wealth advisory firm based in Madison, NJ.

Investing in alternative assets such as commodities, real estate, and absolute-return vehicles is one of the secrets of how wealthy people, with the benefit of sophisticated financial advisors, protect and grow their money. But today, anyone with a reasonable nest egg can do it using low-cost tools such as ETFs.

An even modestly diversified portfolio—with 45 percent in large US stocks, 5 percent in international stocks, 30 percent in bonds, 15 percent in commodities, and 5 percent in real estate (REITs)—would have returned 4.5 percent a year for the 10 years ending Dec. 31, 2009, Miccolis points out. Not a bad return for a time period the pundits have dubbed “The Lost Decade for Investing” (In more typical times, the annual return on that portfolio could be expected to be in the neighborhood of 10 percent).

By contrast, a more traditional, and similarly “moderate/aggressive” portfolio—with 65 percent in large US stocks and 35 percent in US bonds—would have returned just 2.2 percent a year over the same period, and would have lost purchasing power against inflation.

For all of it's aggression, this fund only returned 2.2 percent

“What’s more, the better-diversified portfolio is less volatile over time than that old-fashioned stock-and-bond portfolio” says Miccolis, coauthor of Asset Allocation For Dummies.

But even adding commodity funds and REITs, while important, isn’t going far enough, Miccolis says. He recommends investing in other assets that don’t move in lockstep with the stock market:

Managed commodity futures - these funds vary their bets depending on price trends, and the best ones have a history of performing well whether commodity prices are going up or down.

Absolute return and market-neutral strategies are ways to get stock-like returns with less volatility. These strategies, once accessible only through expensive hedge funds, are now available through cost-effective mutual funds.

Global infrastructure funds offer a way to invest in the building of roads, bridges, tunnels, schools, and hospitals, particularly in developing countries.

Agribusiness funds invest in companies whose main business is food production.

Portfolio Protection

There are ways to utilize the options market and to exploit the market patterns that typically accompany severe market downturns to provide a “safety net” underneath your portfolio.

“Unfortunately, many advisors are not knowledgeable enough about alternative investments to construct a truly diversified and well-protected portfolio,” Miccolis says. “Wealthy people should not be afraid to ask their advisors hard questions about what they’re invested in, and why. If your advisor is clinging to an outdated asset-allocation strategy, it could hurt your chances for a comfortable retirement.”

Based in Madison, NJ, Brinton Eaton is a boutique advisory firm with a long history of serving affluent individuals and their families across multiple generations. The firm helps its clients protect, grow, administer and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton's clients tend to be corporate executives, professionals, entrepreneurs, and retirees with investable assets over $2 million.