Preparing For Volatility

Alternative Investments

The stock market has recovered since the correction earlier in 2016, but we remain concerned about what lies ahead. 

The underlying economic fundamentals don’t point to a strong economy or sustained growth. This recovery is the most tepid of any in the post-World War II era. If one or more interest rate hikes occur in 2016, it is likely that markets will encounter some rough patches. 

In markets like this, investors need to be prepared for volatility. One of the best ways to achieve that goal is making sure alternative investments are a key part of a portfolio. 

Alternatives enhance a portfolio by reducing risk, preserving capital and helping grow principal. The team at Cypress believes a core portfolio should be built on traditional and absolute return strategies, surrounded by alternatives. 

The Benefits
The theory behind alternatives is that they are non-correlated to traditional types of assets, such as stocks and bonds. By allocating enough capital to alternatives, a portfolio can withstand the shock that happens from a correction or bear market. 

Alternative investments include real propertyprecious metals, and private equity ventures. These types of assets often do not move in lock-step with stocks or bonds.

So how do you build a portfolio to increase return and reduce risk with alternatives? It’s important to incorporate three types of assets into your portfolios.

Convergent assets move up and down with the financial markets. These types of assets are traditional stocks and bonds. It’s important that every portfolio have exposure to these types of investments.

Divergent assets are largely immune from the volatility in the financial markets. These assets can include core real estate, as well as timberland, farmland, or distressed debt. Or they can be precious metals such as gold, which often moves in the opposite direction of assets traded in the financial markets.

Asymmetrical assets are those that give up a bit of the upside when the market is rising, but minimize the downside when the markets are cratering. Certain hedge funds constitute the overwhelming majority of these investments. 

Alternatives are a good way to ensure that a portfolio can weather volatility. If the economy falters or if the markets get spooked by interest rate increases, this strategy will help you remain calm and focused.