New York – Will alternative investment options be an important piece in ensuring that an individual has sufficient assets to provide regular income in retirement? Speakers at conferences held here last month maintain that alternative investments will help to deliver added returns that can ensure that income does not run out.
“The use of alternative investments is most timely for the fluctuations “financial intermediaries are wrestling with right now,” said David Reilly, director of portfolio strategies, Rydex Investments, Rockville, Md. He was speaking at a press briefing put together by Rydex, an open mutual fund family offering various alternative investment funds such as a managed futures fund.
Investments such as commodities or currencies may seem technical to the average investor when they look at asset classes, but alternative investments are a “strategic” part of a portfolio, he said.”People’s portfolios are stuffed with domestic stocks,” Reilly noted. Traditionally investment alternatives have been for high net worth individuals, but the average retail investor needs to start looking at other sources of return, he added. “The traditional approach has been to diversify with stocks, bonds and cash,” he said.
In the past, investments in alternative investments required both high minimum investments and high suitability requirements, said Edward Egilinsky, Rydex managing director-alternative strategies. But by using a mutual fund family, there is greater transparency, he added. Schaumburg, Ill.
A survey conducted by Rydex and e-Rewards last month found that 75% of investors surveyed do not know what alternative investments are, and 63% of investors who are familiar with them don’t invest in them because they say they don’t know enough about them. Twenty-five percent of those who do know about them say they are too risky, and 19% don’t know how to buy them, the survey found.
P.J. DiNuzzo, a financial advisor with DiNuzzo Investment Advisors, Pittsburgh, and a speaker at the briefing, said research shows that the return for institutional investors such as foundations and endowment funds is twice as good as for retail investors.
Pittsburgh has one of the oldest populations in the country, he pointed out, so many couples who come to him are trying to determine whether they will have enough of a return in their portfolios to generate income through retirement. Most are invested in 2-3 asset classes, he said. But if a withdrawal rate of around 5% and an inflation rate of 4%-4.5% create a hurdle rate for a retired individual’s portfolio, then market downturns can have a “catastrophic” impact on portfolios that don’t have added returns.
During an Investment Symposium hosted by the Society of Actuaries, Schaumburg, Ill., Jeb Doggett, a partner with Casey, Quirk & Associates, Darien, Conn., noted that investors worldwide face a challenge in an environment where there are lower returns than in the 1980s-1990s.
Increasingly, he said, responsibility is falling on the individual, and “we are really ill-equipped to manage risk or the types of products that offer winning strategies. So “where is the incremental growth coming from?” he asked. One possibility is adding new asset classes and identifying new sources of risk such as commodities, global equity products and even timber, he indicated.
Scott Sleyster, senior vice president and chief domestic investment officer with Prudential Financial, Newark, N.J., offered other means by which individuals can better their chances of having a comfortable retirement with regular income. This is to use automatic enrollment and automatic escalation clauses which would automatically enroll employees in 401(k) plans sponsored by their companies and automatically increase contribution rates as determined by an individual.
Other options include having financial advisors make individuals aware of the right withdrawal rates and making them aware of the need to buffer themselves from inflation risk by being more open to investing in equities, Sleyster said.
Many in the financial services caution that one should consider alternative investments very carefully before putting them in a client’s portfolio.
Alternative investments for the right client, and as a reasonably small portion of the portfolio, may make sense, said Patrick Smith, a vice president and director -advanced marketing and strategic alliances, Hartford Life, Inc., Simsbury, Conn. But, he added in an interview with Income Planning, “my sense is that most individuals are risk adverse and volatility is a huge problem for some people. I would look long and hard at any such type of strategy.”
Smith noted that he is not even a big fan of sector funds. When it comes to retirement security, people don’t want to take unnecessary risks, he cautioned.