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The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

ISBN: 978-1-57660-310-9
320 pages
November 2008
The Only Guide to Alternative Investments You
The rewards of carefully chosen alternative investments can be great. But many investors don’t know enough about unfamiliar investments to make wise choices.   For that reason, financial advisers Larry Swedroe and Jared Kizer designed this book to bring investors up to speed on the twenty most popular alternative investments:

Real estate, Inflation-protected securities, Commodities, International equities, Fixed annuities, Stable-value funds, High-yield (junk) bonds, Private equity (venture capital), Covered calls, Socially responsible mutual funds, Precious metals equities, Preferred stocks, Convertible bonds, Emerging market bonds, Hedge funds, Leveraged buyouts, Variable annuities, Equity-indexed annuities, Structured investment products, Leveraged funds  

The authors describe how the investments work, the pros and cons of each, which to consider, which to avoid, and how to get started. Swedroe and Kizer evaluate each investment in terms of:
  • Expected returns
  • Volatility
  • Distribution of returns
  • Diversification potential
  • Fees
  • Trading and operating expenses
  • Liquidity
  • Tax efficiency
  • Account location
  • Role in an asset-allocation program 

Any investor who is considering or just curious about investment opportunities outside the traditional world of stocks, bonds, and bank certificates of deposit would be well-advised to read this book.

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Acknowledgments.
Introduction.
A Travel Guide to Alternative Investments.
Modern Portfolio Theory.
The Good, the Flawed, the Bad, and the Ugly.  

PART 1 The Good.  
Chapter 1 Real Estate.
Historical Returns and Risk: U.S. Real Estate, U.S. Equities, and International Equities.
The Diversification Benefits of REITs.
Benefits of Diversification: Sample Portfolios.
Asset Location and Real Estate.
Recommended Investment Vehicles.
International Real Estate.
DRW, RWX, and WPS.
DFA International Real Estate Securities Portfolio.
Tax Considerations.
The Wrap-Up on International REITs.
Your Home and the Asset Allocation Decision.
Wrap-Up on the Home as an Investment.
Wrap-Up on Direct Ownership.
Summary.  

Chapter 2 Inflation-Protected Securities.
Real or Nominal Return Bonds: Which Are Riskier?
TIPS: Doing the Math.
Correlations with Equities and Inflation.
Inflation, Price, and Interest Rate Risk.
Inflation Risk.
Price Risk.
Interest Rate Risk.
TIPS: Pros and Cons.
Pros.
Cons.
Allocating Between Real and Nominal Return.
Fixed-Income Assets.
A Shifting Allocation Approach. 
Developing a Strategy.
Implementation.
A Shifting Maturity Strategy.
I Bonds.
Summary.  

Chapter 3 Commodities.
Correlation with Stocks, Bonds, and Inflation.
Event Risk.
A Risk-Reduction Tool. 
Portfolio Efficiency.
Gaining Exposure to Commodities. 
Mutual Funds: QRAAX and PCRIX. 
Commodity-Related ETFs.
Commodity-Related ETNs.
CTAs.
The Argument Against Investing in Commodity Producers.
The Equities of Oil Producers.
Implementation.
Summary.  

Chapter 4 International Equities.
|Emerging Markets Equities. 
Correlations.
Sample Portfolios.
The Risks of Investing in Emerging Markets. 
Small-Cap and Value Stocks.
Recommended Vehicles.
Wrap-Up: Emerging Markets.
International Small-Cap Stocks.
Sample Portfolios.
Recommended Vehicles.
Summary.  

Chapter 5 Fixed Annuities.  
How Long Do Payments Continue?
Determinants of Payment Size. 
The Benefits of Annuitization. 
Mortality Credits Make It Possible.
When Annuities Can Be the Right Choice. 
Evidence from Academia.
When to Purchase a Fixed Annuity.
Inflation-Indexed Immediate Annuities.
Summary.  

Chapter 6 Stable-Value Funds.  
Unique Risk and Return Characteristics. 
Investment Portfolios.
Risks. 
Costs.
Restrictions.
Returns Change Slowly Over Time.
Cash Flows Can Affect Returns. 
Summary.  

PART 2 The Flawed.  
Chapter 7 High-Yield (Junk) Bonds.
Explaining the Low Correlation.
Is Higher Yield Worth Higher Risk?
The Importance of Equity Risk.
Hybrid Securities and Asset Allocation. 
Evidence Supported by Theory.
Do High-Yield Bonds Have a Role?
Illiquid Securities.
Other Negative Characteristics.
Distribution of Returns Matters.
High-Yield Bonds and Efficient Frontier Models.
Inflation Risk.
Asset Location.
The Need for Diversification.
The Historical Evidence.
Vanguard High-Yield Corporate Fund.
More Efficient Alternatives.
Summary.  

Chapter 8 Private Equity (Venture Capital).
Origins.
The Attraction. 
The Historical Evidence.
Characteristics of Private Equity Returns.
Venture Capital Versus Publicly Traded Securities.
Inefficient Diversification.
Bias in the Data.
Perception Versus Reality.
Private Equity’s Role in a Portfolio.
Nonmonetary Explanations for Private Equity Investing. 
Summary.  

Chapter 9 Covered Calls.
Taxes Matter.
Transactions Costs.
An Alternative Strategy. 
Summary.  

Chapter 10 Socially Responsible Mutual Funds.
Defining SRI.
Rapid Growth.
Does Socially Responsible Investing Come at a Price?
The “Price” of Principles.
Summary.  

Chapter 11 Precious Metals Equities.
Risk.
Returns.
Correlations.
The Hedging Value of PME.
Positive Attributes of PME.
Other Considerations.
Implementing the Strategy.
Summary.  

Chapter 12 Preferred Stocks.
Long Maturities.
Risks and Rewards of Long Maturities.
Call Risk.
Credit Risk.
Long Maturities and Call Risk.
Dividend Suspension.
Preferential Treatment for Corporate Buyers.
Other Considerations.
Tax Advantages.
Summary.  

Chapter 13 Convertible Bonds.
The Realities of Convertible Bonds.
Considerations.
Shifting Asset Allocation.
Asset Location.
Complexity.
Summary. 

Chapter14 Emerging Market Bonds.
Risks.
Returns.
Correlations.
Potential Positives.
Additional Considerations. 
Summary.  

PART 3 The Bad.  
Chapter 15 Hedge Funds.  
Exclusive Nature.
Why Hedge Funds Aren’t Mutual Funds.
Facts Versus Fantasies.
Hedge Fund Risks.
Wisdom and Experience, or Hope and Hype?
The Cost of Folly.
How High an Alpha Does a Hedge Fund Need?
How Funds of Funds Increase Hurdles to Outperformance.
The “Ill-Logic” of Hedge Funds.
Long-Term Capital Management.
The Death of Genius.
LTCM’s Downfall: The Tyranny of Market Efficiency.
Risk Versus Uncertainty.
Fooled by Randomness.
Summary.  

Chapter 16 Leveraged Buyouts.  
Summary.  

Chapter 17 Variable Annuities.  
Deferred Variable Annuities.
Tax-Deferred Growth of Earnings.
The Life Insurance Component.
Ability to Annuitize.
Other Negative Features.
Are VAs Really That Bad?
Sold or Bought?
The Art of Deception.
Variable Immediate Annuities.
How Payments Are Determined.
The Purpose of Immediate Annuities.
Possible Reasons to Buy a Variable Annuity.
1035 Exchanges.
Other Considerations.
Summary.    

PART 4 The Ugly.  
Chapter18 Equity-Indexed Annuities.  
Caveat Emptor.
Minimums That Aren’t Minimums.
Penalties for Early Withdrawal.
Tax Inefficiency.
Summary.  

Chapter 19 Structured Investment Products.  
Mondo National Bank Principal Protection.
Notes: Product Features. 
More Efficient Alternatives. 
A Closer Look at Hypothetical FRATS.
Why Such “Attractive” Terms?
More Efficient Alternatives.
Being Careful Out There.
Summary.    

Chapter 20 Leveraged Funds.
The Proof Is in the Pudding.
Summary.  

Final Thoughts.
Notes.
Glossary.
Recommended Reading.
Sources of Data.
Index.
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Larry E. Swedroe is a principal and the director of research for Buckingham Asset Management, LLC (www.bamservices.com). He is the author of Wise Investing Made Simple, The Only Guide to a Winning Investment Strategy You’ll Ever Need, What Wall Street Doesn’t Want You to Know, Rational Investing in Irrational Times, and The Successful Investor Today. He also coauthored The Only Guide to a Winning Bond Strategy You’ll Ever Need. Swedroe has an MBA in finance from New York University.

Jared Kizer, CFA, previously worked as an investment adviser for Buckingham Asset Management, LLC, and authored this book with Larry while he worked there. He has published articles on investing in the Journal of Portfolio Management, Journal of Indexes, and for indexuniverse.com. Kizer has a master’s degree in finance from Washington University in St. Louis.
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“A timely and valuable book. The authors describe twenty alternatives to investing in traditional U.S. stocks and bonds, and how they work. They tell you which ones to walk away from, which to consider (carefully!), and how to get involved. These are good-sense judgments that every investor should pay attention to.”
—Jane Bryant Quinn
Author, Smart and Simple Financial Strategies for Busy People  

“Larry Swedroe and Jared Kizer have written a different sort of investment book, and one that has been sorely needed: a comprehensive guide to the theory, peer-reviewed literature, and practical nitty-gritty of actually deploying portfolio assets. It is a gold mine for even the most experienced of practitioners, and a vital lifeline for small investors. This volume is destined to become the most marked and Post-it–noted tome on the average investment shelf.”
—William Bernstein
Author, The Intelligent Asset Allocator and The Four Pillars of Investing

“What’s missing in your library? Larry’s new Alternative Investments! You’ve already got tons of books on stocks, bonds, and funds. The Only Guide to Alternative Investments You’ll Ever Need is all about the future of investing, the new stuff that’ll give you an edge in the twenty-first century. An absolute must-read!”
—Paul B. Farrell, JD, PhD
Columnist, DowJones-MarketWatch
Author, The Millionaire Code, The Winning Portfolio, and The Lazy Person’s Guide to Investing  

“Swedroe and Kizer provide a thorough analysis of the pros and cons of each alternative investment. They recommend ‘good’ alternatives to add to a diversified portfolio of high-grade bonds and stocks. Perhaps more important, they warn investors about the dangers of truly ‘bad’ and ‘ugly’ alternatives."
—Dr. William Reichenstein, CFA
Pat and Thomas R. Powers Chair in Investment Management, Hankamer School of Business, Baylor University    

“Swedroe and Kizer have sorted through the clutter and confusion of alternative investments to provide the authoritative voice on these much hyped and frequently misunderstood financial products. Kudos to them for sharing their wisdom in a manner that can be easily understood by all.”
—Bill Schultheis
Author, The Coffeehouse Investor  

“What a great service this book is to the investing community! As investors reach out for higher returns, many will venture into the higher-risk category known as alternative investments. For those who are so tempted, this book provides an invaluable guide.”
—Edward R. Wolfe, PhD
Professor of Finance and Director of the Financial Planning Program, Western Kentucky University  

“At the risk of being clichéd, Swedroe has done it again! I make it a point to read every book written by him. This time, it’s all about alternative investments, and Swedroe, running true to form, tells it exactly as it is. He pulls no punches, he holds nothing back. If he doesn’t like something, he says so. If emerging markets equities are downright risky, he doesn’t mince his words or try to put a puffy spin on it. That is what makes reading Swedroe so fascinating.”
—Stuart Kahan
Executive editor, CPA Wealth Provider  

“For investors looking to go beyond an S&P 500 Index fund and a bond fund—and every investor should—don’t make a move until you’ve read The Only Guide to Alternative Investments You’ll Ever Need. Full of historical evidence, practical advice, and specific investment ideas, this book provides a blueprint for what to include and what to avoid in an intelligently constructed portfolio.”
—Robert Brokamp
Editor, The Motley Fool’s Rule Your Retirement service    

“As a financial journalist, I’ve been recommending Larry Swedroe’s books for years because they are filled with invaluable advice that can make any reader a more successful investor. I will now be adding The Only Guide to Alternative Investments You’ll Ever Need to my favored reading list.
—Lynn O’Shaughnessy
Financial journalist and author, The College Solution
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