Why You Shouldn’t Invest in Stocks in 2016

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With a new year and financial instruments jerking like kites in a gust, investors, analysts and advisers alike are scrambling to protect assets against continuing global instability. The Fed may have raised interest rates by its minute quarter of a percent, but stocks are nevertheless flailing, with a nearly 6-percent loss on the S&P 500 so far in 2016 and nearly 7 on the NASDAQ. Many eyes are turning to alternative investments – financial options other than traditional stocks, bonds and cash.

Expanding Alternatives

While often characterized as risky, alternative investments offer utility whether you’re conservative – looking to simply hedge inflation and preserve value – or you’re daring – parsing out that high-risk once-in-a-lifetime bull’s-eye. Although some avenues favor primarily accredited investors, the alternatives market continues to respond to investor demand, diversifying and hybridizing exponentially. For example, DailyAlts.com lists no fewer than 126 liquid alternative funds that were launched in 2015 alone, 92 of them mutual funds, 33 of them exchange-traded funds (ETFs) and one a closed-end fund (CEF). However, that’s just a glimpse of the choices. The trick is to find the investment that works for you in the new environment.

Not Necessarily Real Assets

Alternatives span a breadth of real assets – physical, or tangible, possessions – from whole swaths of agricultural land to commodities and precious metals as well as art, jewelry, literature, wine and other libations, comics and a host of other collectables. For individuals who want to invest in real assets without the liquidity issues and expenses inherent in tangibles, mutual funds, ETFs, funds of funds and other commodity and liquid alternative funds are all open to investment and can provide some indicators of both global-based macrotrends and areas of investment to consider.

Many of our wealthiest investors, however, are pursuing still other financial venues. According to a recent report on investing released by crowdfunding platform OurCrowd “The most dramatic trend shows the sudden ascendancy and dominance of private investing, with the amount of venture capital more than doubling globally to over $135B in 2015 compared to 2013 . . . While private companies with valuations of more than $1B were once so rare they were called ‘unicorns,’ now there are more than 140 such companies.” The world is changing, and opportunities are global, regardless of the financial vehicle.

REITs

Real estate investment trusts (REITs) are much like real estate mutual funds with monthly dividends. Funds invest in property ranging from residential rental properties to commercial, healthcare, rental storage or even agricultural interests. Funds based on actual real estate holdings versus the mortgages on real estate holdings are typically considered more stable. An REIT like Realty Income (NYSE O), for example, pays monthly dividends and is open to retail investors. While the dividend yield for 2015 was 4.4 percent, an all-time low since the company’s founding in 1994, the total return figure was 13 percent. To put those figures in perspective, the Dow’s total return was 0.2 percent, S&P was at 1.4, and the NASDAQ composite came in at 5.7. If your investment was just $10,000, with Realty Income, your investment could have become at least $11,300 versus, respectively, $10,200, $10,140 or $10,570.

Private Equity

Private equity funds focus on raising resources for companies that are developing or expanding. Options range from venture capital funds to seed-stage investments, buyouts, mezzanine funds to bolster a company’s public offering or even distressed securities funds. Alternative investment data source Preqin lists The Blackstone Group, the Carlyle Group and TPG as the three largest fund managers by total funds raised in the last decade – all well above $50 billion. For estimated dry powder, or uninvested funds, first and second place remain the same, but Apollo Global Management ranks third. The largest fund that closed in 2015’s third quarter was Blackstone Real Estate Partners VIII with nearly $16 billion – the last $1.3 billion raised from retail investors. Areas of focus were buyouts, real estate and venture capital for funds closed and aggregate capital raised, with future investment interests firmly targeted at small- to mid-sized market buyouts. In addition, new regulations will expand private equity retail investment options through crowdfunding companies that register with the SEC. The UK-based Seedrs – formerly open to only accredited investors – is the first to register, and others are sure to follow.

Hedge Funds

With the instability of stocks, hedge funds – known for performing well in bear markets – offer the pooling of funds and more active management to earn returns that are not correlated to traditional stocks or bonds. They may focus on distressed securities – commercial debt – emerging markets, arbitrage, futures or assortments known as funds of funds. Investment research and management firm Morningstar states its database “contains data on 7,000 actively reporting funds from more than 3,700 managers,” with some experts citing thousands more. In an article for Winston & Strawn, Don Steinbrugge of Agecroft Partners forecasts that hedge funds in 2016 will yield high single-digit returns and that industry assets will reach an all-time high, with younger, smaller funds having the greatest room for expansion and possibly returns as well as reduced fees for founding investors. That said, what kind of returns can investors expect in 2016? Barron’s lists Tulip Trend Fund Ltd I Class G CHF in its top spot, the fund earning a 19.5-percent return in November 2015; a 1-year term yielded 23.6 while 3 years yielded 75.7 percent, and 5 years brought the figure to 52 percent. Focus seems to be on niche markets, particularly those involving Asia.

Alternatives in 2016

Alternatives are often 20 percent of a diversified portfolio, and as the market teeters and stumbles, just toying with the asset allocation tool on Goldman Sachs’ website shows that alternatives may be more influential than ever. Contrasting a traditional portfolio based on 80 percent S&P 500 stocks and 20 percent bonds with one comprising alternatives, the addition of alternatives reduces risk by no less than 100 percent and suggests returns may be higher up to 75 percent of the time. Emerging markets and even areas of instability may be high earners for those possessing the fortitude to withstand the ups and downs and the diligence to research their investment choices thoroughly. After all, in any market, the rule is to buy low and sell high. With a market of lows to choose from, winners will choose wisely.

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Scott is a contributor to Seeking Alpha, DividendLab.com, WeInvest.net and many other financial sites.