Walking the tightrope of risk, reward

//September 14, 2009

Walking the tightrope of risk, reward

//September 14, 2009

Advisers: Diversified portfolios can protect assetsWhen small-business owners and other individuals review their retirement or other investment portfolios, it’s easy to get discouraged. But investors who stay agile and maintain a diversified portfolio that carries some nontraditional holdings may be better able to balance their risks and returns, some experts say.

First, though, there’s plenty of reason for investors to be concerned. Anyone who had heavy exposure to stocks probably found their holdings hammered in the past year or so, as retail activity slowed, near-cash instruments offered scrawny returns and real estate investments teetered, with a weak, uncertain economy looming over nearly every investment decision.

So it’s understandable why some people freeze and do nothing, said Mark Cortazzo, senior partner of Macro Consulting Group, a financial advisory firm in Parsippany.

“One New Jersey client had $1.5 million earning seven-hundredths of 1 percent annually in a tax-free money market,” Cortazzo said. “He was earning about $1,000 a year, which is too low of a return on that kind of capital. We were able to suggest a money-market account, insured by the FDIC, that yields 1.75 percent,” he said, referring to protection through the Federal Deposit Insurance Corp.

One of the investment products Cortazzo offers is made up of about one-third bonds, one-third equities and one-third alternative investments, like commodities and currencies.

“A portfolio like this may be able to shield your investment from a big hit,” he said. “Some years, you may give up getting a big gain, but you’re also likely to avoid the kind of 40 percent hit to principal that the recent downturn delivered. With our ‘three-legged’ approach, the alternative investments were up about 18 percent, even though stocks and bond investments were both down.”

For a long time, investors thought a mixture of stocks and bonds were enough to diversify a portfolio, said Brian Kazanchy, chair of the investment committee at Morristown’s RegentAtlantic Capital LLC.

“That’s no longer true, though,” he said. “Today, investors need a globally diversified portfolio with different asset classes, and they have to be constantly reviewed.”

Mutual funds, which pool capital from many investors and are structured to match specific investment objectives, may provide some protection against downside risk, Kazanchy said.

Exchange traded funds, or ETFs, also can be attractive, he said. ETFs are securities that track an index, a commodity or a basket of assets, but they also trade on an exchange, similar to the way an individual stock trades.

“Right now, we have allocated a limited amount of capital to commodities and real estate investment trusts in mutual funds and ETFs, but we’re still being cautious” about those sectors, Kazanchy said. “We’re still seeing a lot of distress in the commercial real estate market, and rent rolls will stay under pressure as [retail] tenants, who face their own sales and other pressure, push for better deals. Finally, when [real estate-related] companies try to refinance their short-term loans, they find it tough to find a lender, putting further pressure on them.”

Some corporate bonds may also offer opportunities, Kazanchy said.

“The safest bonds have seen their yields drop because of demand, but you can still find high-quality, short-term bonds priced to yield around 5 percent a year. We like to use mutual funds to invest in bonds. At one time, it may have paid to cherry-pick specific bonds, but now investors can get much wider exposure through a mutual fund.”

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