The Allocator’s Edge: Lessons Learned

I found this book being recommended on Forbes website and decided to read it. For my full review, you may refer to the review that I wrote on 2bookspermonth.com (Link).

Lessons from The Allocator’s Edge

The author discusses at least 18 types of alternative instruments in this book. Some are familiar such as private equity and hedge fund, while some are what I did not know, such as shared home equity contracts and income share agreements. Real estate investment trusts (REITs) are also an alternative. This is a surprise as I always categorise them as equity. From now onwards, I shall classify it as an alternative.

The author did not recommend investing entirely in alternatives. The alternatives serve as a diversifier to traditional stock/bond portfolios. He thinks that the 60/40 stock/bond strategy has passed its prime and the return would not be as good as the past. That is the main reason he recommends alternative investments.

He admits that the costs of investing in alternatives will generally be higher than the traditional asset classes. Nonetheless, he says that cost is not the only factor in making investment decisions. All incremental costs need to be weighed against the expected benefits and all cost savings should be accompanied by an understanding of what you are forgoing. He thinks that the alternative asset classes should be able to provide more in benefits relative to any additional cost they bring to the portfolio as a whole.

As asset classes are made more easily investable and more rapidly adopted by investors, the very nature of those asset classes changes. Performance and correlations of yesteryear may be less relevant going forward as these asset classes become easier and easier to access. Thus, there are chances that the return of the alternatives would not be great once they become widespread.

Some strategies to reduce fragility of a portfolio are

1) building in redundancy and layers (no single point of failure),

2) experimenting and tinkering by taking lots of small risks,

3) avoiding risks that if lost would wipe you out completely,

4) keeping your options open,

5) focusing more on avoiding things that do not work than trying to find out what does work, and

6) respecting the old by looking for habits and rules that have been around for a long time.

Conclusion

For the time being, I plan to allocate up to 20% of my total portfolio to alternative investment. The author recommends a range of 10 – 30%. Recently I have bought some shares of LAND and WOOD to gain exposure to farmland and timberland respectively. If I classify REITs as an alternative, I think I have attained my ideal allocation now. Their function is to cushion my stock portfolio during market downturn. Let’s see if they could fulfil this function.

Recommended book

Interested in The Allocator’s Edge? You may get the book through the link below*.

Get the book here from Kinokuniya Malaysia

*Disclosure: The link above is an affiliate link. If you buy the book using this link, I might get a small commission from your purchase.