In the annual letter for Berkshire Hathaway Inc (NYSE:BRK.A, NYSE:BRK.B), written by Warren Buffett, the legendary investor makes a point of reminding investors about risk in the market.
It is an important reminder that many investors may simply skip over.
Right now, and for the past several years, the market has been doing exceptionally well. But Warren Buffett reminds us that at any moment, for any purpose, the market can suddenly fall and fall significantly.
Buffett points out for periods over the last 45 years in which Berkshire stock itself experienced massive declines.
From March 1973 through January 1975, BRK stock fell 60%. During the crash of 1987, in October alone, Berkshire stock lost 37%. From June 1998 through March 2000, when the rest of the market was going crazy over dot-com stocks, and claiming that BRK stock was a fossil, it fell 49%.
And during the financial crisis from September 2008 through March 2009, Berkshire stock lost 51% of its value.
We are talking about Berkshire Hathaway here. If it can happen to BRK stock, it can and will happen not only to any stock, but to all the securities in your portfolio.
Think about that. Are you ready? Do you really believe that you can handle a 50% decline in your portfolio, not just financially, but emotionally?
You’ve been repeatedly told to have a diversified portfolio. But what does that really mean? It doesn’t mean an allocation of just stocks and bonds. You have to have a very broad range of securities, and that includes investment categories you’ve probably never even heard of. These “alternative investments” should form a cornerstone of every long-term diversified portfolio, but there is a near certain likelihood that you have exactly none of these investments in your portfolio.
These investments are critical to the long-term success of your investments. The reason for these investments, also known as “non-correlated assets”, is to reduce the volatility of your portfolio. Not every security in your portfolio should be going up at the same time, nor should they all be going down at the same time. My investment advisory newsletter, The Liberty Portfolio, heavily invests in different forms of alternative investments and non-correlated assets for exactly this purpose.
These are not hedges so much as simply a way to truly diversify your portfolio. Here is a list of different types of alternative investments that you should be thinking of for your portfolio:
Private equity, hedge funds, peer-to-peer lending, distressed debt, mezzanine loans, senior secured notes, real estate investment trusts, buy-write funds, preferred stocks, managed futures, merger and acquisition arbitrage, securitized notes, global infrastructure, long/short funds, inflation expectation funds, and individual corporate bonds.
Questions? Drop me a line at TheLibertyPortfolio@Gmail.com.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
