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“An investment in knowledge pays the best interest.” — Benjamin Franklin
Is there more to investing than just stocks & bonds?

Diversification is a critical component of any sound investment strategy. Ask a market expert to define diversification and they will tell you to select a ratio of three asset classes that align with your tolerance for risk and time frame.

Given the original theory is almost 70 years old, should you consider investing differently?

That’s right, originally developed in 1952, the theory was refined for decades before it became widely adopted by the broader financial community. In 1990, Harry Markowitz earned the Nobel Prize in Economics for his mathematical models explaining the ability to spread out risk by using uncorrelated investments. Now known as “Modern Portfolio Theory”, it states that an overall portfolio is better off investing with at least 7-8 uncorrelated assets.

Critics have identified several flaws in the theory, as it does not address the natural tendency for humans to make emotional decisions with their investments. Additionally, it does not account for the impact stocks and bonds have on a portfolio as they become more correlated. Keep in mind, that as an investor you want each investment to be less correlated to each other. 

If stocks and bonds are becoming more correlated, then what other asset classes can help spread out risk?

Over the last three decades, correlation has been growing among asset classes, but investors may not know if their underlying portfolio risk is increasing. Most large institutions only use a portion of their portfolio investments in stocks and bonds. In the 1980’s, Yale and Harvard’s endowments became the pioneers in using other asset classes to maintain a high level of return and focus on controlling risk. Now, the Yale endowment is less than 10% invested in stocks.

If adding other investments helps, then why aren’t they more mainstream?

Alternative investments can have high minimum investment requirements, which serve as barriers to investors. If you had the right connections to uncover an opportunity, you might be forced to invest your entire net worth and undermine any diversification benefits.
Since alternative investments do not trade on an exchange, a common structure has developed where alternative investments are an expensive option. Most advisors are compensated off commissions for the products they sell, or they can discuss options in their firm’s approved inventory. This structure can limit clients and it creates potential conflicts.

How is Box Financial different?

As an independent investment advisor, we take the time to source and vet these opportunities. After we complete our research & due-diligence, our investment committee then determines if the opportunity meets our required risk & return profile. Since our cost is not tied to a transaction, we negotiate on our clients’ behalf to establish better terms, lower minimums, or cost structure.

While it takes more time and resources to identify, we believe that used in the right proportions can add tremendous benefits to our clients’ portfolios.
Contact us at www.boxfinancial.com

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