Ask the Expert

Walter Davis, Invesco Alternatives Investment Strategist
Walter Davis
Invesco Alternatives Investment Strategist

Have an alternatives question? Ask Walter.

Looking for options beyond the traditional 60% stock/40% bond portfolio?

Consider the alternatives. If you're new to alternative investing — or if you're simply trying to keep up with this quickly growing area — we invite you to direct your questions to Invesco's Alternatives Investment Strategist Walter Davis. An industry veteran with more than two decades of experience, Walter is dedicated to helping investors understand alternatives and alternative strategies.

Read some of the questions Walter has answered recently.

Please type your question about alternatives to Walter below.

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Recent questions

That’s a great question. However, I have to reply with another question: What’s your goal? Different alternatives provide different benefit potential—for example, certain investments may provide more income than others, and other alternatives might have higher growth potential.

In today’s market environment, many people are looking for investments that may act differently than traditional stocks. If that’s your goal, then there are four types of alternatives I would highlight: Market neutral, global macro, managed futures, and long/short equity strategies. Market neutral is designed to help insulate the broader portfolio against market swings. Global macro and managed futures may opportunistically trade the current market environment and seek to take advantage of the increase in volatility that is now in the markets. Finally, long/short equity seeks to provide some downside protection while retaining the ability to participate should equities bounce back.

Depending upon what you are trying to achieve in your portfolio, there are investments that may be specifically designed to help you meet your goals. Your financial advisor can help you find the right investments for your situation.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

That’s a great question. My understanding is that the 60% equity /40% bond split came out of Harry Markowitz's research in the 1950's. As you suggested, the 60/40 split was based on relative market capitalization of stocks and bonds at that time. Since that time, the 60/40 split between stocks and bonds has evolved into a common back of the envelope way to allocate across stocks and bonds.

With regard to the 50% stocks/30% bonds/ 20% alternatives allocation that appears in Invesco's advertising campaign, the idea we're emphasizing is that investors have new tools (alternative mutual funds, ETFs and UITs) available to them when building their portfolio; The 50/30/20 split is not based on market capitalization. Invesco believes that there is no one size fits all allocation, be it to stocks, bonds or alternatives. While we're not prescribing a specific allocation for any investor, we believe investors could potentially benefit from making alternatives more of their core. The 50/30/20 illustration is simply one example highlighting that concept. We believe that investors need to determine the allocation that makes the most sense for them given their specific situation, and as part of that process, investors need to consider whether or not the use of alternatives can improve their ability to achieve their investment goals.

You have asked a very important question. Given that I don't know the specific alternatives that you're looking at, as well as the other holdings in your portfolio, my answer will be necessarily general in nature. Your financial advisor, who knows your full financial picture, can help you create a portfolio that is best suited to you based on your personal risk tolerance and time horizon.

One way of funding an allocation to alternatives is to base your decision on the investment and return/risk characteristics of the alternatives you are considering. For example, if the alternatives which you are looking to invest in are equity-like (e.g. invest extensively in the equity markets and/or have equity-like return and volatility profiles), you could fund the allocation from the equity portion of your portfolio. Similarly, if the alternatives which you are looking to invest in are fixed income-like (e.g. invest extensively in the fixed income markets and/or have fixed income-like return and volatility profiles), you could fund the allocation from the fixed income portion of your portfolio.

If you prefer a simpler approach, you might consider allocating proportionally away from equities and fixed income to fund your allocation. For example, if you were going to invest 10% of your portfolio into alternatives, you could take 10% from your fixed income allocation and 10% from your equity allocation in order to fund the alternatives allocation.

The views and opinions expressed are those of the author and are subject to change based on factors such as market and economic conditions. The author's views and opinions are not necessarily those of Invesco and are not guaranteed or warranted by Invesco. These views and opinions are not an offer to buy a particular security and should not be relied upon as investment advice.

While alternatives are new to most individuals, they have long been used by institutional investors (such as pension plans and university endowments) and high-net-worth investors. Now, these investments have been made widely available to all investors through mutual funds, exchange-traded funds and unit investment trusts.

In the broadest sense, alternatives are investments other than traditional long only investments in publicly traded stocks and bonds. Investments that invest in assets other than, or in addition to, stock and bonds would be defined as alternative. Also, investments that "short"1 would be defined as an alternative, as would be investments in non-publicly traded instruments, such as bank loans.

1 An investor will short (sell short) an investment when they expect the price of a stock to decline in value.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Alternative investments are designed to achieve a number of key objectives that are critical to helping investors build wealth, preserve wealth and enhance income. Different types of alternatives may be able to help investors:

  • Generate more consistent and less volatile returns.
  • Cushion a portfolio during times of stock weakness.
  • Increase current yield during a low-rate environment.
  • Mitigate the effects of inflation and/or rising interest rates.
  • Benefit from opportunities outside of stocks and bonds.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Hedge funds are typically aggressively managed portfolios of investments that use advanced investment strategies such as leverage, long, short and derivative positions with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Hedge fund managers have less restriction on their investment methodologies than mutual fund managers, and hedge funds are less regulated and therefore offer less investor protection than mutual funds. Mutual funds are more transparent with regard to disclosure of underlying holdings and have lower fees than hedge funds.

Hedge funds are only available to institutional and high net worth investors. However, many mutual funds managers are implementing strategies similar to hedge funds, providing access to strategies that have traditionally not been available to all investors.

At Invesco, we divide the universe of alternative investments into two categories: alternative assets and alternative strategies. Alternative assets would be comprised of investments into real estate/REITs, infrastructure, Master Limited Partnerships and commodities. Alternative strategies represent a wide variety of strategies that invest on a long and short basis across the equity, fixed income, currency, commodity and/or derivative markets.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.