As wonderful as life can be here in paradise, especially the weather this year, many investors have other issues on their minds when as it pertains to their investments.
Clearly at this point the concept of keeping an eye on the prize could refer to many variations of success when it comes to investing, however in this case, we will be focusing on a recurring theme as of late.
Although many investors are pleased with where the stock market has taken them, the big question now seems to be whether or not to stay in the market or exit and wait for it to exhale.
Most agree that the market has begun to feel a bit overheated, for others this feeling has lingered for a few years. As this astonishing run continues, many are concerned with their portfolio gains, while at the same time avoiding massive losses which could, in some cases, erase a majority of the success from the last six years. Remember, the 100 percent run up, although a wonderful sight to behold, was also necessary to simply break even from the roughly 50 percent losses during the last crash. Still the fact remains that investors who have remained in the market are conflicted as to whether or not to exit the market or simply ride it out with the confidence that the Trump effect will continue indefinitely.
Understandably, many are not sure how to proceed from here. In keeping with the idea of keeping an eye on the prize, in this case we are referring to the Nobel Prize, and no, that is not a typo. We are referring to the Nobel Prize winning research which illustrated the unequivocal power of diversifying with manage futures. There has been a newfound interest in alternative investments in the wake of current market conditions and the lingering scars from the last decade of market gyrations. Consequently, many retired investors have embraced alternatives within their portfolios, and perhaps there is no greater diversified asset class than managed futures. Let’s look at the basics.
Professor Harry Markowitz, who shared the Nobel Prize in 1990 based on his research dating back to 1952 which has “ … become the frame upon which Institutions and savvy investors construct their investment portfolios.” Dr. Markowitz was the first to “ … quantify risk and demonstrate how and why portfolio diversification with managed futures can work to reduce risk and increase returns for investors.” Here is where it becomes critical for investors to perhaps look beyond their scope of understanding and accept that The Nobel Prize was awarded based on the quantitative results of the research. In other words, even if you don’t get it or understand futures, the reality is that they can, in fact, reduce overall portfolio risk while at the same time vastly increase portfolio returns.
Yet, another prize we we’re keeping an eye on here is the prize of better returns with lower risk. For that matter, many investors own various investing strategies such as options trading, etc…and have no clue as to how they work, yet are often willing to accept the basis as an asset class within their portfolio. The research illustrates how Futures can offer a tremendous advantage for investors of all types. This is likely why he received the Nobel Prize!
The research goes on to state that “ … many investors are under the delusion that their portfolios are diversified if they are in individual stocks, mutual funds and bonds.” The reality is that “ … while these are all different investments, they are still in the same asset class and move in concert with each other.”
Dr. John Lintner, of Harvard University, in a “1983 landmark study” concluded that “managed futures show substantially less risk at every expected level of return…while simultaneously enhancing overall portfolio performance.” The concept is simple; enhance overall performance by both reducing risk and outperforming stocks. Remember, the numbers never lie.
We can see how investors keeping an eye on the prize of coveted returns can find sanctuary by incorporating a modest portfolio allocation with managed futures en route to the life of a SWAN, Sleep Well At Night.
William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.