Over the past six weeks or so I’ve attempted to argue that one should employ Alternative Investments in your investment portfolios. This post is to express how I recommend that should be done.

I’ve alluded to an organization in Tacoma, Washington with whom I have a contractual relationship. I entered into my agreement with them when I discovered they had the ability to provide unique investment expertise on behalf of my clients. The name of this organization is Purcell Advisory Services LLC and their web address is http://purcelladvisory.com/

Purcell is a third party manager. As such, they look for and find investment expertise that is deep, intelligent, complete, and elegant. It comes packaged in seven different portfolios that cover the investment waterfront.

After exploring what they had to offer, I have reached what I consider a definitive conclusion. From this point forward, I intend for their offerings to represent the core of my investment recommendations to clients.

If you’ve read my posts on Alternative Investments (click on the category by that name to the right and it will bring up all of them) you’ll conclude that a simple buy and hold approach to portfolio management is not the best solution these days. We can argue that it will return to favor, but for now, it is out of favor.

The next step is to know that a widely accepted position in the investment advisory community is that a 60/40 split between stocks and bonds is a “balanced” approach. In other words, if you have no interest in when you make the investment and when you intend to take your money and spend it, a 60/40 split is a good starting point. If you are more conservative or perhaps older in years, you might instead choose a 50/50 or 40/60 split. If you are younger or more aggressive, you might move toward a 70/30 or even a 80/20 split.

Mindful that Purcell does not have a generic 60/40 split portfolio among their published strategies, and mindful they have a strategy called Managed Alternative Assets, I asked them to prepare a Risk vs Reward chart that compared two specific investments that could be described as “balanced”. The first was a generic, “balanced” mix of 60% in the S&P500 and 40% in bonds. The second was one that employs three of their portfolios, in a combination that I believe is “balanced”. Here is the chart they sent me.

There are two specific points that are critical to my analysis. The first one is the point where the vertical line in the center crosses the horizontal line in the middle. You can see a triangle buried in the mix. That point shows the average annualized return, over the past 5 ½ years, of 60% in the S&P500 and 40% in the Barclay’s 25+ Bond Index. That’s the generic balanced approach I referenced above. The number behind the triangle is 3.7%. It’s a positive number, and it reflects the investment crisis we experienced in 2008-2009.

The next point to examine is the X that appears in the upper left quadrant. This X is the number that comes from my attempt to create a “balanced” investment strategy with 40% allocated to Purcell’s Dynamic US Government Bond strategy, 30% to the Growth Plus equity strategy and 30% to the Managed Alternative Assets strategy. Each are represented individually and the X is what results from the combined elements.

Before I tell you the number behind the X, I want to offer two disclosures. One is that I have no idea what I am having for lunch tomorrow, much less what an investment might do over the next five plus years. Past performance is no guarantee of what will happen going forward. So do not follow my advice on the assumption I “know” what is going to happen. I don’t.

The second disclosure is that this is my analysis. I have trusted the charts prepared for me by other people whom I trust but I do not have first hand knowledge that the numbers presented have absolutely no flaws. No one should ever make an investment decision based on someone’s assertion that what they say is true. I believe what I’ve shown is true, but it may only be an approximation.

I will end by saying that the number behind the X, for the time period shown, is 17.2%. This number is net of all fees. Had you been prescient, and put $100,000 in the mixture I’ve created and shown here on January 3, 2006, it would have grown to $239,000 by the end of last June. I simply can’t find another option to offer my clients with a history like that. So going forward, this is what I intend to recommend to my clients and anyone else who will listen.