For the past ten years, the markets have essentially gone nowhere. And it is entirely possible this history will repeat itself over the next ten years. If the pattern holds, all investors will be forced to rethink their assumptions about asset allocation and diversification. Otherwise, we’re unlikely to be successful if our objective is to grow money over time.

First, a short primer on alternative assets. To start with, the phrase alone implies something other than normal. And normal, in the traditional sense, is thought of as stocks, bonds and cash. The implication being that an “alternative asset” is something other than stocks, bonds or cash. Which is partially true, and since there is no global word police keeping track of such things, we should include among “alternative assets” such things as commodities, real estate, or even rare coins. In recent years, the phrase has come to include hedge funds, venture capital, and things like oil and gas partnerships.

The case for alternative investments has to include not only these non-traditional asset classes but appropriate strategies for employing them in an investment portfolio. And this is where the rubber meets the road. When we as advisors know intuitively that there are ways to make money even when the markets are in free fall or simply bouncing around, the question surfaces “How can we employ these ideas to benefit our clients?”

In the traditional world of investment management, it is generally accepted that if you can wait long enough, a simple “buy and hold” approach will prove successful. But what if your time horizon is less than “eventually”? And no matter how good you are technically, some of the outcome is driven purely by luck; the random effect of when you started and when you stopped. In terms of most clients, this means when did you retire and when will you die. If you were born in 1941 vs 1946, your outcomes will be different if you retire at age 65.

Mindful that money only has value if it can be used to buy the things we all need and then the things we want, how much is enough? It is generally accepted that a withdrawal rate of 5% per year applied against a traditional investment portfolio will assure the portfolio owner that he will not run out of money before he or she dies. But there is frustration knowing that its possible the client will die twenty years from now with enough money to have spent three months every year at a villa in the south of France. But didn’t because of caution. But could have since the timing was such that he/she could have withdrawn 8% per year and still been OK.

Lastly, a primer on useful terms, terms that will show up later as this Case for Alternative Investments continues. This is by no means a definitive list, but it’s a start.

Buy and Hold is by itself easily understood; you “buy” an investment and you “hold” it. The physical expression of this is that you own the assets and they are “long” in your account. This physical expression contrasts with the alternative which is “short’ the asset. When you “short” a position, you “borrow” the asset and sell it, with the expectation that at some point in the future, you will return it. Your motivation for doing this is that you believe the value of the asset is going to go down, not up.

It doesn’t take a genius to realize that if you sell something “borrowed” for $10 and later, when the price drops to $5, you buy what you earlier sold, but now with your money, and give it back to whomever you borrowed it from, you have made $5. The genius is in knowing how to do this effectively over time. And included in the mix are often alternative assets. In Part II, I’ll add to the list of words and phrases. The plan is to help you develop the understanding necessary to include alternative assets in your portfolio.