We live in a world of uncertainty and volatility.  Many countries are awash in debt as governments scramble to implement strategies to defuse the crushing impact to their economy.  There are no magic elixirs but only painful options that include both higher taxes and strict austerity measures.  The effects of this precarious plight can be witnessed in Greece where the economic meltdown and subsequent violence may be a harbinger of events to occur in other industrialized countries.

The unprecedented condition of the global economy demands insightful analysis utilizing innovative strategies that considers both the economic and financial climate.  Currently, both Europe and the United States are faced with political obstacles that are preventing the enactment of policies that could pave the way for recovery.  This problem will be exacerbated if countries delay the implementation of long term viable solutions.   

In a global economy, the United States can no longer operate in a vacuum.  The events in Europe, with great risk of sovereign and bank defaults, will most certainly impact the United States.  For example, a few months ago during one of the many Greek crises, it was rumored that Greek debt had permeated US money market funds.  While this rumor was never confirmed, it seems likely that shaky European debt is present in so called “safe” US securities.  This fear may explain the significant outflows recently in money market funds. 

Past investment axioms may not apply in this era of excessive debt and possible defaults.   When S&P lowered the credit rating of US government debt to AA, conventional wisdom would dictate that interest rates should rise.  Instead, as Europe remained in crisis mode, interest rates dropped sharply with the 10 year Treasury declining to a paltry 1.7%.  And with investors fleeing to safe investments in the face of possible currency debasements, gold has become a sought after haven. 

All of this turmoil has caused me to re-think and revise my investment strategy.  Instead of strictly diversifying by asset class, I now also diversify by strategies that use hedging techniques and vehicles such as shorting securities and purchasing derivatives.  I have also incorporated low and non-correlated assets such as private REITs, currency, managed futures and hard assets.  In summary, my primary objective for employing alternative investments is to help mitigate risk.

As my investment clients are now aware, I have been very busy adding alternative investments to all portfolios.  My goal is to allocate at least 25% to alternative investments or alternative strategies.  With correlations between international and US equities very high, I believe there is little benefit to maintaining significant allocations in each asset class.  Hopefully as theses crises ease and fundamental analysis once again becomes the driving force for investment selection, asset allocation will represent the optimal method for diversification.  But in the meantime, the deployment of low correlation strategies represents a more tactical approach for risk management.  Of course, as has been the case recently, the stock market may experience a significant rally.  But I would rather forsake some gains and err on the side of safety in the event financial chaos becomes systemic in the Eurozone. 

 Clifford L. Caplan, CFP®, AIF®


Diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.  Investing in alternatives may not be suitable for all investors as it involves substantial risk.  In many cases investors must meet specific suitability standards before investing and understand these investments are for a long-term investment horizon. 

In the News:  My opinions about a variety of financial topics have appeared often since the last newsletter.  In August, my comments appeared in two Associated Press and two Thomson Reuters articles as well as the Boston Business Journal in an article titled “Sound Advice:  From Strategies to Age Related Choices, Planners Weigh in on the Best Courses to Follow”.  In September, I commented in a Reuters article on the stock markets impact on the ability of parents to pay college tuition. 

Links for all of these articles can be accessed on my website.