Alternative Investment Strategies - The Sad Statistics
Alternative Investment Strategies are born from mainstreamstatistics. Year after year, mainstream investors underperform the general market. Even during the greatest bull market run in American history, 1984 to 2002, the typical investor earned an average of 2.6% per year on his or her investments, while the overall market averaged 12.2% per year, as reported by Bottom Line Tomorrow, January 2004.
Obviously, if traditional investment strategies are producing these types of results for traditional investors, then it just makes sense that certain contrarians will rise to the surface and reveal their alternative investment strategies.
Alternative Investment Strategies - The Scenario Underlying the Statistics
Maybe the best way to introduce alternative investment strategies is to further investigate why traditional investment strategies produce subpar results like those highlighted above. To illustrate, here's a standard financial planning scenario pitched to traditional investors. Read carefully and see if you have any issues with what is being said. Do you see the need for alternative investment strategies?
FIRST: The traditional financial strategist conducts an initial interview. He or she asks you when you want to retire and determines how much you will "need" to do so. The advisor plugs the information into a computer program and calculates the amount that must be "saved" in the remaining years to achieve the determined goal. The advisor then attaches some financial products to the timeline and collects your money for the first round of investing.
So, what's the true goal of traditional investment strategies? To accumulate enough principal to live off the interest at retirement.
SECOND: Assuming that you'll be "poorer" when you retire, your financial strategist uses qualified retirement plans such as IRAs and 401ks to the maximum extent possible. The presumption is that your withdrawals at retirement will be subject to income tax at a lower tax bracket.
Now that's planning for success. How can traditional investment strategies build true wealth if they're grounded in a presumption of relative poverty?
THIRD: The accumulation of capital in your qualified retirement accounts is measured by an average annualized rate of return. In no way does this measurement of performance account for erosion factors such as taxes, inflation, and hidden transaction costs. In addition to these direct erosion factors, traditional investment strategies don't account for indirect and ongoing eroding effects such as poorly structured home loans, car loans, insurance, taxes, consumer debt, interest rate changes, and lost opportunity costs.
It sounds like we're burying our collective heads in the sand.
I guess what we don't know (on the expense side) won't hurt us (today)!