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News Bulletin : ADA News Bulletin October 2010
32 OCTOBER 2010 “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – MARK TWAIN The above humorous quote has been credited with creating a phenomenon called the ‘Mark Twain effect’ where the returns in some stock markets are lower in October than in other months. This belief has been further fuelled by the fact that the serious stock market crashes of 1929, 1987 and 2008 all occurred in October. Personally, I am not suggesting that October is any riskier than any other month but now that I have your attention I would like to elaborate on last month’s article regarding alternative investments and how they can be used to lower your portfolio risk. Last month, I attempted to dispel some myths surrounding hedge funds or absolute return funds. The most common belief is that absolute return funds are extremely risky. However, it has been proven that allocating a portion of your investments to alternative assets that are not positively correlated to other asset classes such as shares can lower your overall portfolio risk whilst increasing your returns. Recently, the Bank of America Merrill Lynch Global Research identified the key reasons cited by institutional investors for investing in hedge funds as increased diversification, uncorrelated returns and a focus on absolute returns. This month, I will attempt clarify the nature of the relationship between risk and return and look at how an allocation of a portion of your portfolio to alternative investments can aid in diversification. My experience is that many investors fail to adequately understand risk which can result in some very unpleasant investment outcomes. One key factor facing investors considering alternative investment strategies is how to identify investment products and managers that actually mitigate risks whilst providing enhanced returns. In reality there are a limited number of providers that can provide this type of diversification and deliver consistently high returns. Investors need to consider the talent and track record of the fund managers involved. Often highly skilled managers will have substantial amounts of their own net wealth invested in their own funds. This serves to align the managers’ interests with those of their customers. Compiled by Michael Lannon can reduce risk AlternAtiVe inVeStmentS investment insight www.2020directinvest.com.au/ada | 1800 352 021 100% entry fee rebate on managed funds
ADA News Bulletin September 2010
ADA News Bulletin November 2010