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Avoid Undue Complexity

Sigma Investment Counselors

February 27, 2015

I recently attended an investor conference in NYC hosted by a large money center/investment bank.  While I rarely attend such events, I was particularly interested in the topic of “alternative investments” and how they may be used to either increase the return and/or reduce the volatility in a portfolio.

At the risk of over-simplification, equity and fixed income securities are “traditional” asset classes and form the foundation of a well diversified portfolio.  Sigma would include investments in real estate and commodities in this category as well.

“Alternative investments”, by our definition, are an investment strategy, not an asset class.  This is an important distinction.

We have historically steered clear of these products as they tend to be very complex, the investment strategy may not be prudent, they tend to lack marketability, they typically have very high imbedded costs and as a group, their investment performance tends to be erratic and non-competitive.  Moreover, there is a body of work that suggests that these investments may actually increase the systematic (market) risk within a portfolio.

There are also serious compliance issues surrounding the use of alternatives but we will leave that for another day.

As a nod to our former colleague, Bergie, we abide by the KISS principal (Keep It Simple, Stupid).

Bob Bilkie®

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