Clients urgently need to face the reality that expected returns aren’t what they used to be, so investors “must be exposing themselves to very different risks than they’re used to,” says Larry Swedroe , director of research at Buckingham Strategic Wealth, in an interview with ThinkAdvisor.

Persuading clients to think about the growing risk of equity investments, as well as the growing risk of a hard economic landing, means helping them manage those risks by “reducing their exposure to longer-term stocks and bonds.” without going into cash, says Swedroe.

For many clients, the answer lies in alternative investments. And that’s exactly what Swedroe recommended, as he reveals in the interview.

These vehicles include floating rate private debt, long-short factor funds, litigation funding, private credit and reinsurance funds.

Swedroe’s analyzes of academic research inform the RIA’s investment strategy recommendations.

Considering the increased likelihood of an economic hard landing or recession, Swedroe calls the Federal Reserve’s decision not to act quickly to rein in inflation at a time of “massive fiscal stimulus and a strong economy” and to keep interest rates low “one of the most incompetent decisions ever made.

In the interview, the author of “Your Complete Guide to a Successful and Secure Retirement,” co-authored with Kevin Grogan, explained what he considers the ideal investment portfolio — think Harvard and Yale — that uses a strategy where “the risks are more evenly distributed.”

Swedroe’s latest book is “Your Essential Guide to Sustainable Investing” [Harriman House]co-authored with Samuel C. Adams.

In our conversation, Swedroe names the main advantages of green stocks in the context of the “Holy Trinity” of brown stocks, aka “sin stocks”, which over the past 100 years have “outperformed the market by about 3% per an,” he says.

A member of the firm’s investment policy committee, Swedroe was previously vice president of Prudential Home Mortgage and senior vice president and regional treasurer of Citicorp.

ThinkAdvisor interviewed Swedroe on June 10. He was talking about St. Louis, where Buckingham is.

He said his recommendation to clients was to invest “in things that aren’t usually available in public markets… We try to buy different risks and do it with the least possible expense.

Here are excerpts from our interview:

THINKADVISOR: How should people invest for retirement right now?

LARRY SWEDROE: We strongly recommended that investors change the way they view their portfolios. We try to get people to recognize that they live in a world where expected returns are far lower than what they are used to.

They must expose themselves to risks very different from those to which they are exposed [accustomed] at. Maybe that means investing in things that aren’t usually available in public markets.

So we tried to get our customers to add more and more of these assets. We try to buy different risks and do it cheaply.

Basically, what is your approach?

We want to invest systematically; some call it passively. But it’s about avoiding trying to find alpha, if you will, with individual stock picking or market timing.

We try to get clients to think about the risks in equities, which have increased, as has the risk of a hard landing due to policy mistakes — too much fiscal and monetary stimulus.

Inflation risk has increased. So we need to think about how investors can isolate or minimize those risks by reducing their exposure to stocks and longer-term bonds without just going to cash, where you’re doomed because you get no return .

What types of alternative investments do you recommend?

Many of our clients have very large investments in floating rate private debt. We use a fund called CliffWater Corporate Lending Fund (CCLFX). These are only floating rate debts which are currently yielding around 7.5%.

If rates go up, it [fund] will immediately increase yield and you will be covered.

It carries some business cycle risk, as companies could go bankrupt. But he has so much protection.

You take risks, but you get a massive reward. Today, 5-year Treasury bills are at 3%; [with this fund] you get 7.5%.

CliffWater recently launched another vehicle, an extended loan fund, called CELFX.

What other alternatives are your clients investing in?

Things like structured life settlements, drug royalties, and private real estate, which can focus on low-duration assets.

If you have a 10 or 20 year lease on a property, that’s not a good hedge against inflation. But if you’re investing in single-family homes for rent, that’s a one-year lease — and every month some rents go up.

So we invest in vehicles that invest in things that have a shorter duration, like single-family homes for rent, warehouses with short-term leases, hotels — things where prices can adjust quickly.

What about raw materials?

This is another example of an asset class that can provide diversification and benefits.

And then there are the long-short factor funds. We are investing in one called QSPRX [AQR Style Premia Alternative Fund Class R6]. It’s long value, short growth – and completely uncorrelated to stocks and bonds.

How did these alternatives perform?

Everyone is up this year, while stocks and bonds are hammered.

What others are you investing in?

Contentious financing and private credit. Again, there is no exposure to interest rate risk or equity risk. It’s a different risk. They all have a liquidity premium.