Alternative Investing Strategies Despite Market Volatility (Episode 23)

That's a good question. And I think part of our job, my job at alpha core is to demystify what the world of alternatives are and what that means to the average investor. And I think generally speaking, what's happened over the last 10 or even 20 years, the investor has gotten more interested and invested in passive long, only stock index portfolios, whether those are ETFs or mutual funds, obviously Vanguards been on, obviously Vanguard's been kind of, uh, the Genesis of that. And then it turned into all sorts of other ETFs could be long only in, in equities and that we call the passive world of investing. And, and we do still think that should play a role in most people's portfolios. But what happened over that decade or two is that the passive investor took over the active investor. The active investor was pushed to the wayside and you kind of read a lot of different studies about active investing is dead. Now, all you need is long, only equities, no active investors worth their fees. They can't beat the benchmarks. I mean, we've, I've heard that for my entire career,

Yeah, exactly. And that's, you know, in a lot of cases that's been true. The active investors haven't been able to outpace the market, especially a fed infused market where the fed was essentially a put option. Every time the market would go down five or 10%, the market would rally back up because the fed would lower rates or they'd do QE one or two or three or four or five, right? There's a lot of QE that actually helped fuel this market, rebound and, and rally. So we believe we're heading into a new world for the next decade where active comes back to the forefront and active becomes where everybody wants to go. And in that world of actively managed portfolios is one form of alternative investing. And you could call those different things because the world of alternative is essentially an alternative to long, only stocks or long, only bonds, right?

That's kind of the generally accepted definition. What's an alternative. And when you start looking in that world and peeling away, peeling the layers of the unning back further and further, you see, okay, well, this manager might be long sum stocks and short sum stocks. And that would be a long short strategy. And that's one type of alternative strategy. One manager might be long commodities and short bonds, and that's another type of alternative strategy. It's kind of important to define what type of alternative you're talking about. And then start to say, okay, what should I expect from this alternative investment going forward? And that's usually how we put together portfolios. We combine traditional stocks and bonds with various alternative strategies.

I think there's this world of commodities that have been traditionally looked at as an alternative and real estate too. So real assets we'll call them. We define the world of alternatives in two major buckets. So there are alternative asset classes. Those are things like commodities. So gold, silver, even energies. And then you can get into the whole grains and weed sector. That's a whole commodities world that you could invest in. And if those go up in price, that's gonna give you, uh, some inflation protection. Then there's things like private, real estate or REITs or private equity. Those are alternative asset classes and they have a certain correlation to those asset classes or what we'll call sophisticatedly a beta to those asset classes. Right? And we think some of them are good to have in an inflationary environment like we've seen. So obviously energies have soared in the last couple of years, inflation and a variety of things that contributed to that gold can be potentially a hedge to inflation.

Hasn't turned out to be the best so far, but it can be. And real estate has definitely been an inflation hedge at least for the last three to five years. So those are potentially long, only alternative asset classes that could do well. The alternative strategies are much more liquid, more nimble and actively managed, right? So an AC, like I was mentioning you a long short equity strategy. That's an alternative strategy, but it's not gonna be just long one stock for the next 10 years. It might be longest stock for maybe three months or six months, and then out that stock. And it might be short of stock for three or six months than out that stock. That's a much more actively managed alternative strategy. And then there's alternative asset classes and you combine the two together and that's how you get a really diversified plan.

Sure. I think that, you know, the key to, you know, one of my local clients said to me a long time ago is once you've accumulated some assets, you wanna be able to hold onto those assets and not suffer big swings or big drawdowns, we'll call them. So if you're already in the end zone, you don't ever wanna be put back on the 20 yard line again. Right. And that little statement from a client of mine 20 years ago, just sticks with me over and over again. And I think a lot of the investors, retail investors and institutional investors really feel that way. They've had a good run. Maybe they've saved their whole life, or they're getting close to retirement and they're saying, well, I don't wanna lose this. And how do I protect it? Number one, that's kind of like the first is do no harm to my portfolio.

And then second, how do I grow it? And so you've gotta put together a diversified methodology for us. That includes four major asset classes that includes long only stocks. And we'll talk a little bit about how those sectors we like in that space long, only fixed income, same thing. We'll talk about sectors in there. And I think there's very few sectors that we like in fixed income today. And then that's a long, only alternative asset classes and active alternative strategy. So there's four buckets you've gotta allocate to in the last couple of years, we've been leaning towards in the equity space in particular more value, stock names and less growth stock names. And so that has done well for us, but only up until the last nine months or so, right. We were adamant about buying value names. These are things like financials and energies and things with very much, much lower PE ratios, um, and shorting or going, getting out of, or going less long in the growth names or the tech names. And up until, yeah, let's say nine or 10 months ago that wasn't a great winning strategy cuz of all of the tech names, rallying all the Fang stocks and you can kind of name it. Those are the ones that were the darlings of COVID. But up now you've seen and you've had this huge pullback in tech names and a big rallying value name. So there's this kind of volatility and dispersion has created a lot of opportunity in those types of strategies on the value side,

Very much? Are you hit it right on the head? It's much more fun to talk about the next new technology that's gonna revolutionize the world. And definitely there are some of those companies that will do that, right? The key is though there are some old line companies that can also do that, right? They'll innovate, they'll evolve. They have cash on their balance sheets to actually go invest and potentially buy some of these smaller firms as well. And so those names may look kind of boring, cuz they've been around for 30 years or 40 years or maybe even longer, but they're evolving as well. They're not gonna sit there and just, you know, grind into the ground and let some new company just take over the world. They're gonna innovate too. So we think that is, you know, from in this stage of the market cycle, when the fed is already telling us, they already raised, once they're gonna raise multitude of times going forward. These old line companies have cash that can actually acquire merge and grow. Those to us are much more relevant and should be the ones you have in your portfolio today. If you're gonna pick stocks,

So I'll talk about both sides here because there was this world of, you know, um, COVID darlings that did extremely well and

Peloton. Exactly. Right. Amy, I think Peloton now is down almost 90% from its peak, right? So it got so far ahead of itself and I have a Peloton, so I like Peloton, but I don't think, uh, you know, there was no earnings to go along with, uh, the stock price that you know, was ultimately, uh, decimated over time. So you've gotta conscious of things that, that become these kind of waves of, you know, clubs that people have said, okay, we're gonna make this sure. This, this thing goes to the moon. And same thing with some of the internet stocks are the media companies like a Netflix, which was obviously, and still is a leader in that streaming space. But as competitors came out and you got to a point where there's not enough subscribers in the world for them to grow that they wi they grew, it became very difficult.

Yeah. On the long side, we like some more stable names. Now there's one in our backyard. We're based in San Diego and we really like Qualcomm. You know, obviously there's been chip shortages. There have been other names that have been like Invidia that's really taken to the forefront. But we think Qualcomm is one of those companies that I was talking about earlier. They've been around for a while. They've got great management, they've got cash on their balance sheet. They're trading at about a 10 PE ratio, which is extremely low in that, in that semiconductor space. So that's a name that we think if you're gonna look for where they're going, they're growing, they're actually supplying chips for cars and in the electric car vehicle space. So that's an old school call it old guard, a semiconductor company that we think is well managed and is poised for real growth.

Well, the company like Qualcomm has been, you know, kind of pulled down with some of that fear that there's gonna be this, you know, delayed revenue coming in, but they also have many other businesses, right? 5g is, they're obviously the leader in that space of 5g. And because they've been such long time suppliers in this space via India, China, obviously America as well. They've got longstanding relationships that they've been able to tap into that some of the newcomers haven't been able to. So we're thinking they're gonna be a beneficiary more in the near term than the long term. And so that's one of the reasons why we like, uh, Qualcomm in that space. And if you kind of switch slightly to a different sector, we also feel the same way about Blackstone and which is different than black rock. We think Blackstone, which is a as an asset management firm that focuses on alternative strategies in their portfolio. And that's another one that's been around for a while. Uh, they've been kind of pulled down slightly with most of the bank stocks, but they're not a traditional money center bank. This is a, a firm that manages private equity, private, real estate alternative investment strategy. So they've got a very diverse portfolio and you've combined that with something like a Qualcomm, which is a much more sector focused with an asset management firm, like a Blackstone, you really are starting to get diversified equity portfolio,

Yeah, I think in the, if you kind of take the equity bucket in that equity bucket, generally leaning towards more value based companies and that's one sector I'll call that asset class equities. And in that asset class, we're gonna be leaning much more, more towards these old guard value based companies. You know, I've been in San Diego for quite a while. Qualcomm used to be the cutting edge, you know, semiconductor. They were the darling. And I think they're gonna be that again, people are gonna realize, wow, this has been a great company to be invested. They've been well managed and they're sitting still on the forefront of a lot of these technologies. So that's kind of the equity sector that I'm talking about.

The reason we are not huge fans of allocating a large chunk into traditional fixed income is that an arising rate environment, bond values will go down. So there'll be a time again where we do become a fan of fixed income. It's just that right now, as we see the next six to 18 months unfold in front of us, your traditional municipal bonds or your treasury bonds kind of five, 10 year, 30 year duration, those are the ones that been hit hard. And we don't see that changing anytime soon, but there is a reason to keep some traditional. And this few there's a couple reasons why one you'd wanna have the little bit of fixed income for liquidity reasons. If you want truly liquid, I would keep short duration treasuries as a potential liquidity hold for your allocation. But also if we get further sell off inequities and we get the fed starts to see that we're gonna have a negative second quarter GDP, then the fed might say, well, we could potentially pause a little bit here and that's not, I'm not predicting.

They're gonna say that. But if they do say that traditional fixed income will probably rally off that messaging from the fed. So if the fed doesn't about face like they did in 2018, then you might see a rally in fixed income. We're in a different scenario than we were in 2018, cuz we didn't have inflation at 8.5% back then. So I don't think we're, they can't really do that this time around, but if they do you want to have a slice. So that's kind of goes to our bigger picture, 30,000 foot. You want to have a slice of every, as these four big asset classes. If you're looking for income in the fixed income space, we like the world of private credit. And a lot of people put that into the alternatives bucket, but private credit includes things like what we'll call middle market lending and middle market lending.

These are lenders that lend a companies that are kind of between this 200 million to a billion dollar size, which there are thousands of those in the country. And the traditional banks have kind of stepped away from that since the eight crisis they've stepped into the very, very large multi-billion dollar loans they've made. And part of the reason why they've done that is some of the regulations that the SCC has put down on the banks and the, and as well as the fed has kept rates low for so long, they can do these very large loans, make a lot of money and have a very high credit quality behind them in the large banks. But that left this world of great paper between 200 million and a billion in smaller companies. I mean, quote unquote, smaller companies kind of middle market companies. And you can earn yields that are two, 300 basis points higher than you would get in say a five or 10 treasury.

There's a few and a lot of kind of blue chip names have come down into this space. So Blackstone is one of, I was mentioning they have private credit as well as Apollo and another firm called Cliffwater, which is a very large international consulting firm. And those funds that created a registered interval funds and an interval fund typically means you can allocate to them either on a daily or monthly basis. And you'll typically have quarterly liquidity, so you're not gonna get daily liquidity, right. You're gonna have quarterly and there'll be a process to redeem. So it won't be as liquid as traditional, uh, fixed income. So you gotta be conscious of that. If, as an investor, you're not gonna have access to this every single day. Uh, but you shouldn't expect to because they're making loans into middle market companies. Right?

Yeah. You can go to traditional custodians like Charles Schwab, each grade fidelity and you can look on, and these are, they're registered mutual funds, but in a category called interval funds. So they're registered with the SCC. They can find them. They have, they all have typical, uh, ticker symbols behind them, but they're not traded like a typical mutual fund in that they can get out every single day. It's just a longer liquidity lockup period.

Right. That's exactly right. You get what's called an illiquidity premium. So in some cases I think a lot of investors will realize if, if you've got daily liquidity, that's some people really seek that out. They wanna have daily liquidity. They wanna be able to get out when they wanna get out. But in many cases that's the worst type of liquidity you should have. right. Some people are their own worst enemies, right? Where they're getting outta the bottom, they're buying the top. They're selling the bottom for us. You, if you're willing to give up some, uh, liquidity and go to a quarter or even a semi-annual and you don't really need that liquidity, then there's blue chip strategies that you can allocate to like private credit will. That'll actually give you some more yield and give you a higher return potentially.

I would say start with the big picture, look out five to 10 years and then start applied diversification to your portfolio and diversification going forward for the next 10 years, won't look like diversification for the historical 10 years. That needs what we'll call. It needs a third leg of the stool. You need stocks, bonds, and alternatives. And that third leg of the stool is gonna give you the ballast. And it's gonna give you some potential returns in a, in a down market and potentially yield when there aren't yields to get from traditional fixed income.

If you go to our website, which is Alphacore wealth.com, you can register right on the site. You can talk to one of our team, uh, advisors and research analysts, and we're more than happy to help.

Thanks for having me.