Wealth Management Blog

Posts published in January 2013

Dig Deep Into “Treasure Assets”

By JJ Burns

January 15, 2013

Have you ever dreamed of owning a 1965 Aston Martin like the one driven by James Bond in the movies? Or a 17th century Stradivarius? A piece of your favorite sports team? It may not be as far-fetched as it once seemed. Increasingly, well-heeled investors are diversifying by adding a special kind of alternative investment—known as “treasure assets”—to their holdings.

Although you probably can’t afford the top items on your wish list, you may still be able to indulge your inner fantasies. In fact, some private funds allow investors to pool their money to buy treasure assets. A firm will typically charge a 2% administrative fee in addition to taking a healthy cut of any profits, but the cost may be well worth it to aficionados.

Realize, however, that these undertakings are highly speculative and not for the faint-hearted. Frequently, items are illiquid and have no real intrinsic value. And commissions and other fees can eat into any gains you might eventually realize.

Still, for some investors, pride and joy trumps other factors. In any event, treasure assets should represent only a small part of your overall portfolio. Keeping that in mind, here are three hot buttons.

1. Classic cars.

It’s well-known that most cars lose value as soon as you drive them off the lot. But vintage automobiles can be an exception to that rule. According to the Historic Automobile Group International (HAGI), vintage Ferraris rose 28% in price during the first 10 months of 2012, while Porsches climbed 15% in value. The HAGI index of the top 50 classic cars shows prices increasing almost 64% since 2008.

2. String instruments.

An auction house sold a 1721 Stradivarius violin for almost $16 million in 2011. Maybe you will have to lower your sights, but investments in other string instruments, including vintage electric guitars, are available. A 2011 study tracking violin sales showed an average annual return of about 3.5% between 1850 and 2008 after inflation adjustments, and concluded that the instruments have a slight negative correlation with stocks and bonds (in other words, violin prices tend to rise when the value of those other assets falls).

3. Wine.

This category is attracting attention as an inflation hedge with potential for growth. But investing in wine is risky enough to drive you to drink. The Liv-ex 100 Fine Wine Index, which tracks prices of 100 top wines worldwide, says it has produced an annualized return of 10% since 2002. However, the index is down nearly 10% for the first 10 months of 2012.

Other treasure assets, such as interests in major and minor league sports franchises, may strike your fancy. But be aware that glamorous investments are more likely to produce personal enjoyment than a steady return. View these offerings with your eyes wide open.

It’s a Question of Proper Balance

By JJ Burns

January 14, 2013

Do you tend to put off certain chores—maybe cleaning the gutters, organizing your files, or changing batteries in smoke detectors? Most people can add another item to their to-do list: rebalancing a portfolio. However, unlike neglecting some of the others, failing to rebalance could result in significant financial losses.

Why do you have to rebalance in the first place? If you keep your holdings intact without making any changes, your preferred asset allocation will eventually get out of kilter. As a result, you could be exposing yourself to considerably more risk than you expect or consider acceptable.

Let’s say you’ve determined the optional approach for your current needs is to maintain a portfolio with 50% allocated to stocks, 30% to bonds, and 20% to cash and other vehicles. (This is a purely hypothetical example and not indicative of any specific portfolio.) If the value of your stocks has increased during the past year, your portfolio might now have 75% in stocks, 15% in bonds, and 10% in cash and other investments. Stocks are historically more volatile than other assets, and with that heavier concentration, you may not feel comfortable with your risk exposure. To get back to your previous allocation, you could sell some shares and put the proceeds into bonds and cash.

Similarly, if the value of your stocks has declined so that they represent only 35% of your portfolio, you may want to convert some of your other holdings into stocks.

There are several other direct and indirect reasons for rebalancing. Consider these three:

  • It encourages you to cash in profits from investments that have done well and shift those funds to other investments that have merit but have yet to increase in value.
  • It gives you the opportunity to review the mutual funds in your portfolio to see whether they’re still performing up to your expectations.
  • It can smooth out investment returns. All asset classes are cyclical, so rebalancing removes some of the inherent volatility associated with investing.

How often should you rebalance? For many investors, it makes sense to do it twice a year to keep a portfolio on track. Certainly, you should rebalance at least once a year. Another approach is to rebalance whenever an asset class deviates from its target percentage by a specific amount—perhaps five percentage points. For example, a portfolio with a 50% target allocation in stocks would be rebalanced any time the value rises to 55% or sinks to 45%.

Rebalancing is an important part of long-term investment management. It ensures that you are buying asset classes when they drop in value and don’t overweight investments that have appreciated. Over a long period, it can make a major difference in a portfolio’s performance and risk exposure. In addition, rebalancing can be managed for tax efficiency. Our firm handles rebalancing for clients we work with.