12/Jan/2008
Keeping Your Balance without Losing Your Mind: The Strategy of Low-Correlation Investments
By Michael Word, Vice President/Financial Advisor
Stanford Group Company, Baton Rouge
As many bicyclists will tell you, “balance” is one of those things that do not even enter your mind until you are on your way to the ground.
While you are slaloming your way through the crowds on the boardwalk, all you are thinking about is the speed and the excitement – and then gravity takes over.
The same scenario can be applied to the world of investment. One day, you are flying through the crowds thinking about the speed and excitement, and then look out below.
That is the single, greatest argument for what the pros call “low-correlation” investments. Those are asset classes that do not correlate tightly with the movement of the broad markets, i.e., they do not move up or down based on the activity of Dow Jones & Co. or NASDAQ.
How long can you stand on one foot?
Diversifying your investments is conventional wisdom. Planners, advisors, authors, the columnists in the financial section and your brother-in-law will tell you to put your eggs in several baskets, to spread your investments across stocks, bonds and cash, and to watch out for falling markets.
It’s good advice – as far as it goes.
But the shortfall is the advice may not go far enough.
Think of diversifying in the stocks/bonds/cash area as balancing on one foot. To get the other foot down, consider the observation from John Adams of Stanford Financial Group Research: “When investors think about diversifying, they usually think about stocks and bonds. Most tend to overlook less mainstream vehicles such as precious metals.”
“Good as gold” … for real
Financial planners and sophisticated investors have liked gold, coins and precious metals for decades as a means of ballasting portfolios against economic storms and hedging against inflation.
Inflation has not been a problem in recent years, but as the U.S. dollar has weakened versus international currencies in the past couple of years, the price of gold has soared. For instance, according to Joseph Frisard, President of Stanford Coins & Bullion, gold was priced at around $270 an ounce on Sept. 11, 2001, and had reached around $650 an ounce by early 2007 – an increase of about 140 percent in five-plus years.
A useful rule of thumb is that 5-10 percent of a well-balanced portfolio be devoted to coins and precious metals, the low-correlation investments that are truly things of beauty.
Other alternatives
Finally, do not forget about “alternative” investments, such as hedge funds and commodities. These can be good choices to help mitigate risk and also to provide greater leverage for potential increased return.
Hedge funds are different from conventional mutual funds in that they are designed with the goal of benefiting no matter which direction the market moves.
Commodities are another low-correlation investment that can give you significant returns. Unfortunately, that also comes with considerable risk of losing your investment and should be done carefully and monitored by a professional.
That is the final note on all these low-correlation possibilities. Unless you are very familiar with the products, the processes, and the risks as well as the rewards, it is always a good idea to consult with an investment professional.
The opinions expressed herein are those of the writer and may not reflect those of Stanford Group Company, Stanford Financial Group or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security. Stanford Group Company is a member of the Stanford Financial Group.
©2007 All rights reserved, Stanford Group Company. Member FINRA/SIPC.
By Michael Word, Vice President/Financial Advisor
Stanford Group Company, Baton Rouge
As many bicyclists will tell you, “balance” is one of those things that do not even enter your mind until you are on your way to the ground.
While you are slaloming your way through the crowds on the boardwalk, all you are thinking about is the speed and the excitement – and then gravity takes over.
The same scenario can be applied to the world of investment. One day, you are flying through the crowds thinking about the speed and excitement, and then look out below.
That is the single, greatest argument for what the pros call “low-correlation” investments. Those are asset classes that do not correlate tightly with the movement of the broad markets, i.e., they do not move up or down based on the activity of Dow Jones & Co. or NASDAQ.
How long can you stand on one foot?
Diversifying your investments is conventional wisdom. Planners, advisors, authors, the columnists in the financial section and your brother-in-law will tell you to put your eggs in several baskets, to spread your investments across stocks, bonds and cash, and to watch out for falling markets.
It’s good advice – as far as it goes.
But the shortfall is the advice may not go far enough.
Think of diversifying in the stocks/bonds/cash area as balancing on one foot. To get the other foot down, consider the observation from John Adams of Stanford Financial Group Research: “When investors think about diversifying, they usually think about stocks and bonds. Most tend to overlook less mainstream vehicles such as precious metals.”
“Good as gold” … for real
Financial planners and sophisticated investors have liked gold, coins and precious metals for decades as a means of ballasting portfolios against economic storms and hedging against inflation.
Inflation has not been a problem in recent years, but as the U.S. dollar has weakened versus international currencies in the past couple of years, the price of gold has soared. For instance, according to Joseph Frisard, President of Stanford Coins & Bullion, gold was priced at around $270 an ounce on Sept. 11, 2001, and had reached around $650 an ounce by early 2007 – an increase of about 140 percent in five-plus years.
A useful rule of thumb is that 5-10 percent of a well-balanced portfolio be devoted to coins and precious metals, the low-correlation investments that are truly things of beauty.
Other alternatives
Finally, do not forget about “alternative” investments, such as hedge funds and commodities. These can be good choices to help mitigate risk and also to provide greater leverage for potential increased return.
Hedge funds are different from conventional mutual funds in that they are designed with the goal of benefiting no matter which direction the market moves.
Commodities are another low-correlation investment that can give you significant returns. Unfortunately, that also comes with considerable risk of losing your investment and should be done carefully and monitored by a professional.
That is the final note on all these low-correlation possibilities. Unless you are very familiar with the products, the processes, and the risks as well as the rewards, it is always a good idea to consult with an investment professional.
The opinions expressed herein are those of the writer and may not reflect those of Stanford Group Company, Stanford Financial Group or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security. Stanford Group Company is a member of the Stanford Financial Group.
©2007 All rights reserved, Stanford Group Company. Member FINRA/SIPC.
