Taking the (Investing) Road Less Traveled

This article was written with Steve Cordasco, of Cordasco financial network. It's part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Steve Cordasco

TheStreet.com, Fall, 2012

NEW YORK (TheStreet) — I believe the portfolios of retirees and near-retirees can benefit from alternative investments. But Izzm not sure that hedge funds really reprsent the alternative investment asset class.

Hedge funds seem like a way for Wall Streetzzs brightest stars to make obscene amounts of money by doing what they have always done, but with a lot less transparency.

But because hedge fund managers are some of the best and brightest and tend to hold ideas close to the vest, it is worth listening to them when they do talk.

Accordingly, when Steve Einhorn, vice chairman and portfolio manager for Omega Advisors; Harvey Eisen, chairman of Bedford Oak Advisors; and Michael Novogratz, a principal with Fortress Investment Group (FIG) got together for a panel discussion about the direction of the markets for the balance of 2012 and for 2013, I was anxious to learn their thoughts.

Itzzs worth noting that the panel discussion was related to charity, not something hedge funds are typically known for.

The panel was held to drum up support for Trading Day for Kids, a once-a-year event (to be held Oct. 25 this year) where the hedge fund community does all its trading through one broker who then donates all the commissions to Youth, I.N.C., a master charity that redistributes the money to some wonderful nonprofits in New York City.

So what was the consensus view? All three investors are bullish for next year and bullish long term. This is good news, sort of.

I say “sort of,” because underpinning all of their thinking in one way or another, was the Federal Reservezzs quantitative easing policy and the advent of QE3.

Fortresszz Novogratz said, “With QE3, Bernanke basically doubled down. To me it looks like maniacal behavior precisely designed to bring about a change in thinking that will cause dollars now in conservative fixed-income investments to rotate into riskier asset classes.”

I donzzt entirely agree. As the clock ticks along on the Fedzzs policy approach, the day may well come when the $10 trillion sloshing around in fixed-income investments held by pensions funds will migrate into equities. To put the possible impact of this into perspective, the market capitalization of the New York Stock Exchange is about $15 trillion.

Despite the compelling nature of these numbers, I donzzt see wholesale migration into equities as a sound strategy for the average everyday investor. Institutions and hedge funds may be equipped to win at this game, but individuals are not.

Retirees and near-retirees need to let the institutions play their own game. Individuals need to focus their own efforts on figuring out how to generate the income they need when interest rates are very low.

Thatzzs why Izzm sticking with my strategy of shifting away from the classical pre or postretirement portfolio into what I call the neoclassical retirement portfolio. Herezzs a quick summation of the difference:

Not U.S. Treasuries … but corporate bonds. Not high-yield money market funds … but gold. Not fixed annuities … but foreign bonds, bank loan funds and mortgage backed securities. Not growth index funds … but carefully selected dividend-paying stocks.

I think whatzzs important about this thinking is that the investment portfolios of retirees and near-retirees donzzt need to be dictated by what institutional investors are doing.

If institutions rotate into equities and drive prices higher, thatzzs your cherry on top. If these market dynamics never materialize, and stocks remain flat, then the focus on income will turn out to be prudent.

Imbedded in the shift to the neoclassical retirement portfolio is the assumption of more risk. This may make for some uncomfortable and possibly sleepless nights, but in the current environment, I donzzt see that individual investors have a choice if they donzzt want to outlive their money.

I feel this is very prudent advice. It might also be very modestly priced advice as well, because investors who make the shift toward producing more income are able to do so without paying 20% of gains to the fund manager.

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