Robert Hort is 64, an age when many investors start to slow down a bit—at least when it comes to where they put their money. Bonds begin to look more appealing than stocks, and cash looks like a safer bet than bonds. So where is Hort, a business owner from suburban New York City, putting a chunk of his savings? Into some of the spookiest stuff on the market, from junk bonds to commercial real estate. “They help me sleep at night,” says Hort.
For many investors, only a dose of sleeping pills would provide rest with a portfolio like that. But at a time when Hort should be thinking about safeguarding assets for retirement, he seems to be amping up his risk. Indeed, he’s one of a growing number of investors thumbing their noses at the conventional wisdom, turning much of what they learned about investing upside down.
The old rules, of course, told investors to stick with a mix of stocks, high-quality bonds and cash, and to stay away from hard-to-fathom stuff like junk bonds, options and emerging markets. And for a long time, that strategy seemed to work. But after a decade of watching the stock market go nowhere—and after the stomach-churning ups and downs of the past few years—more investors are willing to try something new, even if it means stepping out of their comfort zone. A growing number of market experts and financial advisers are telling them that some of the same assets they were supposed to be afraid of can actually be good for them—as long as they don’t take it too far. Commercial real estate, for instance, tracks the stock market only about 57 percent of the time, and some types of real estate investing can offer yields of more than 8 percent, well above what most stocks and bonds provide. Options like puts and calls can act as insurance policies for stock holdings or generate income on the side, limiting losses in down or flat markets, says Hans Olsen, chief investment officer for J.P. Morgan’s private-wealth-management business.
Some people are listening. While billions of dollars have flowed out of domestic stocks and into bonds this year, investors have also poured $12.2 billion into emerging-market stock funds that invest not just in China and India, but farther afield, like in the Middle East and Africa. Another $2.1 billion has flowed into real estate funds. At the same time, options trading volume is on the rise at some discount brokers. While some investors are just chasing the latest trend, others have come to the conclusion that financial moves that seemed superscary not that long ago might actually provide balance to their portfolios—and boost returns over the long run. “You can justify the risks,” says Brian Kazanchy, a financial adviser in New Jersey.
Of course, no one is telling investors to abandon U.S. stocks and investment-grade bonds; advisers say they remain bedrocks of any sound portfolio. (Hort, for example, keeps less than 30 percent of his portfolio in the risky stuff.) And even as individual investors are catching on, the idea of building a basket of higher-risk investments isn’t exactly a state secret. Many hedge funds have followed similar strategies for decades, and mutual funds are starting to employ them too. Investment managers at the endowments of Harvard and Yale have used them for years, with long periods of success interrupted by big setbacks in the financial crisis.
Still, stepping up the risk even in part of a portfolio goes against the instincts of many investors, like telling your mother she was wrong about drinking milk and getting enough sleep. For investors who want to reevaluate what they consider scary, here are four ways to start.
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Scary Investments...That Work?http://bit.ly/aU0cni -Junk bond does sound like a scary investment!
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