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Understanding Alternative Investments

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As stewards for your wealth we want you to know that we are constantly reviewing investment options to ensure you have access to the best processes and investments to help you reach your goals. Traditionally, investors have had only three asset classes to choose from when investing – stocks, bonds and cash. The typical Canadian balanced account has 60% of the portfolio allocated to stocks and 40% allocated to bonds. As you can see in the chart below, this type of portfolio would have produced a impressive return of approximately 9% per year on average since the early 1980s to present day. However, this was during a period of time when interest rates were falling from historic high to historic low values. If we look back to the 1950s when interest rates were similar to today and then rose, the outcome is quite different. A balanced portfolio in this scenario would only have produced a 5% annualized return over that 30-year period. This return is below what most retirees need to have to support their retirement goals. This outlook has led us to look at some alternatives to the traditional asset classes. The term Alternative Investment covers a wide range of investments but essentially is any investment outside of the traditional asset classes - stocks , bonds or cash. Alternative assets can include, private equity, venture capital, real estate, hedge funds, managed futures, art and antiques or private lending (debt) for example. Who is investing in alternative asset classes already? Think of the Ontario Teachers Pension (OTPP) or the Ontario Municipal Employee Retirement Scheme (OMERS) or even the Canada Pension Plan (CPP). These plans combined have over $700 Billion in assets according to recent annual reports. Further south, you have endowment funds, such as Yale and Harvard, with at least $30 and $40 billion in assets respectively. One thing they have in common is the responsibility to manage their investments to provide long term ongoing payments to their beneficiaries, not unlike the requirement for your retirement savings. The other commonality is an allocation to alternative investments that exceeds 50% of their assets.

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