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The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

by Larry E. Swedroe, Jared Kizer

November 2008

Intermediate to advanced

289 pages

6h 45m

English

Wiley

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A Travel Guide to Alternative InvestmentsModern Portfolio TheoryThe Good, the Flawed, the Bad, and the Ugly
1.1. Historical Returns and Risk: U.S. Real Estate, U.S. Equities, and International Equities1.2. The Diversification Benefits of REITs1.2.1. Benefits of Diversification: Sample Portfolios1.3. Asset Location and Real Estate1.4. Recommended Investment Vehicles1.5. International Real Estate1.5.1. DRW, RWX, and WPS1.5.2. DFA International Real Estate Securities Portfolio1.5.3. Tax Considerations1.5.4. The Wrap-Up on International Reits1.6. Your Home and the Asset Allocation Decision1.6.1. Wrap-Up on the Home as an Investment1.6.2. Wrap-Up on Direct Ownership1.7. Summary
2.1. Real or Nominal Return Bonds: Which Are Riskier?2.2. TIPS: Doing the Math2.3. Correlations with Equities and Inflation2.4. Inflation, Price, and Interest Rate Risk2.4.1. Inflation Risk2.4.2. Price Risk2.4.3. Interest Rate Risk2.5. TIPS: Pros and Cons2.5.1. Pros2.5.2. Cons2.6. Allocating Between Real and Nominal Return Fixed-Income Assets2.7. A Shifting Allocation Approach2.7.1. Developing a Strategy2.7.2. Implementation2.8. A Shifting Maturity Strategy2.9. I Bonds2.10. Summary
3.1. Correlation with Stocks, Bonds, and Inflation3.2. Event Risk3.3. A Risk-Reduction Tool3.4. Portfolio Efficiency3.5. Gaining Exposure to Commodities3.5.1. Mutual Funds: QRAAX and PCRIX3.5.2. Commodity-Related ETFs3.5.3. Commodity-Related ETNs3.5.4. CTAs3.6. The Argument Against Investing in Commodity Producers3.6.1. The Equities of Oil Producers3.7. Implementation3.8. Summary
4.1. Emerging Market Equities4.2. Correlations4.3. Sample Portfolios4.4. The Risks of Investing in Emerging Markets4.5. Small-Cap and Value Stocks4.5.1. Recommended Vehicles4.6. Wrap-Up: Emerging Markets4.7. International Small-Cap Stocks4.7.1. Sample Portfolios4.7.2. Recommended Vehicles4.8. Summary
5.1. How Long Do Payments Continue?5.2. Determinants of Payment Size5.3. The Benefits of Annuitization5.4. Mortality Credits Make It Possible5.5. When Annuities Can Be the Right Choice5.6. Evidence from Academia5.7. When to Purchase a Fixed Annuity5.8. Inflation-Indexed Immediate Annuities5.9. Summary

6.1. Unique Risk and Return Characteristics6.2. Investment Portfolios6.3. Risks6.4. Costs6.5. Restrictions6.6. Returns Change Slowly Over Time6.7. Cash Flows Can Affect Returns6.8. Summary
7.1. Explaining the Low Correlation7.2. Is Higher Yield Worth Higher Risk?7.3. The Importance of Equity Risk7.3.1. Hybrid Securities and Asset Allocation7.3.2. Evidence Supported by Theory7.4. Do High-Yield Bonds Have a Role?7.4.1. Illiquid Securities7.4.2. Other Negative Characteristics7.4.3. Distribution of Returns Matters7.4.4. High-Yield Bonds and Efficient Frontier Models7.4.5. Inflation Risk7.4.6. Asset Location7.5. The Need for Diversification7.6. The Historical Evidence7.6.1. Vanguard High-Yield Corporate Fund7.7. More Efficient Alternatives7.8. Summary
8.1. Origins8.2. The Attraction8.3. The Historical Evidence8.4. Characteristics of Private Equity Returns8.5. Venture Capital Versus Publicly Traded Securities8.5.1. Inefficient Diversification8.5.2. Bias in the Data8.6. Perception Versus Reality8.7. Private Equity's Role in a Portfolio8.8. Nonmonetary Explanations for Private Equity Investing8.9. Summary
9.1. Taxes Matter9.2. Transactions Costs9.3. An Alternative Strategy9.4. Summary
10.1. Defining SRI10.1.1. Rapid Growth10.2. Does Socially Responsible Investing Come at a Price?10.2.1. The "Price" of Principles10.3. Summary
11.1. Risk11.2. Returns11.3. Correlations11.4. The Hedging Value of PME11.5. Positive Attributes of PME11.6. Other Considerations11.7. Implementing the Strategy11.8. Summary
12.1. Long Maturities12.1.1. Risks and Rewards of Long Maturities12.2. Call Risk12.3. Credit Risk12.4. Long Maturities and Call Risk12.5. Dividend Suspension12.6. Preferential Treatment for Corporate Buyers12.7. Other Considerations12.8. Tax Advantages12.9. Summary
13.1. The Realities of Convertible Bonds13.2. Considerations13.3. Shifting Asset Allocation13.4. Asset Location13.5. Complexity13.6. Summary
14.1. Risks14.2. Returns14.3. Correlations14.4. Potential Positives14.5. Additional Considerations14.6. Summary
15.1. Exclusive Nature15.2. Why Hedge Funds Aren't Mutual Funds15.3. Facts Versus Fantasies15.4. Hedge Fund Risks15.5. Wisdom and Experience, or Hope and Hype?15.5.1. The Cost of Folly15.5.2. How High an Alpha Does a Hedge Fund Need?15.5.3. How Funds of Funds Increase Hurdles to Outperformance15.5.4. The "Ill-Logic" of Hedge Funds15.5.4.1. The Power of the EMH15.6. Long-Term Capital Management15.6.1. The Death of Genius15.6.2. LTCM'S Downfall: The Tyranny of Market Efficiency15.6.3. Risk Versus Uncertainty15.6.4. Fooled by Randomness15.7. Summary
16.1. Summary
17.1. Deferred Variable Annuities17.1.1. Tax-Deferred Growth of Earnings17.1.2. The Life Insurance Component17.1.3. Ability to Annuitize17.1.4. Other Negative Features17.1.5. Are VAs Really That Bad?17.1.6. Sold or Bought?17.1.7. The Art of Deception17.2. Variable Immediate Annuities17.2.1. How Payments Are Determined17.2.2. The Purpose of Immediate Annuities17.3. Possible Reasons to Buy a Variable Annuity17.3.1. 1035 Exchanges17.3.2. Other Considerations17.4. Summary
18.1. Caveat Emptor18.2. Minimums That Aren't Minimums18.3. Penalties for Early Withdrawal18.4. Tax Inefficiency18.5. Summary
19.1. Mondo National Bank Principal Protection Notes: Product Features19.2. More Efficient Alternatives19.3. A Closer Look at Hypothetical FRATS19.3.1. Why Such "Attractive" Terms?19.3.2. More Efficient Alternatives19.4. Being Careful Out There19.5. Summary
20.1. The Proof Is in the Pudding20.2. Summary
IntroductionChapter 1Chapter 2Chapter 3Chapter 4Chapter 5Chapter 6Chapter 7Chapter 8Chapter 9Chapter 10Chapter 11Chapter 13Chapter 14Chapter 15Chapter 16Chapter 17Chapter 18Chapter 19

Content preview from The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Notes

Introduction

^[1]

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

^[82]

^[83]

Chapter 10

^[84]

^[85]

Chapter 11

Chapter 13

^[90]

^[91]

Chapter 14

Chapter 16

Chapter 17

Chapter 18

Chapter 19

^[176]

^[1]Gregory Baer and Gary Gensler, The Great Mutual Fund Trap (New York: Broadway Books, 2004).

^[2]Susan Hudson-Wilson, Frank J. Fabozzi, Jacques N. Gordon, Mark J. P. Anson, and Michael Giliberto, "Why Real Estate," Journal of Portfolio Management, Special Issue: Real Estate (2005).

^[3]Joseph Gyourko, "Real Estate Returns in the Public and Private Markets: A Reexamination Following the Rise of Equity REITs," Working Paper (January 7, 2004).

^[4]Karen Damato, "Ghosts of Dead Funds May Haunt Results," Wall Street Journal, April 4, 1997.

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