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When markets are riding high, it’s easy to focus only on returns. But failing to plan for downside risks may be hazardous to your finances. That’s because investments are penalized more from losses than they are rewarded from gains. Why? For every loss your portfolio experiences, you need an exponentially higher return to break even.
Source: American Century Investments. This hypothetical situation is intended for illustrative purposes only and is not representative of the performance of any security or index. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities. Past performance is no guarantee of future results.
Holding a diverse mix of investments has the potential to mitigate the impact of declines. Consider alternative mutual funds, which do not perform the same way as stocks and bonds and so adding them to your portfolio may help manage a number of threats such as:
Alternative mutual funds hold a variety of non-traditional asset classes and often employ more complex trading strategies than traditional mutual funds. Each asset class and investment strategy has unique risks, which typically makes alternative mutual funds more suitable for investors with above-average risk tolerances and longer investment horizons. It’s important to understand a fund’s distinct features, risks and rewards before you invest.
During periods of market stress, alternative investments historically have shown that they do not perform in line with stocks and bonds. While it won’t guarantee positive future results, choosing assets that don’t move together may help reduce overall losses.
Source: FactSet. Data from 4/1/2016 to 3/31/2019. Alternatives represented by HFRX Fixed Income Credit Index. Stocks represented by S&P 500 Index. Core Bonds represented by Bloomberg Barclays US Aggregate Bond Index. The indices do not reflect fees, brokerage commissions, taxes or other expenses of investment. Investors cannot invest directly in an index. Past performance is no guarantee of future results.
In past markets, investors expected equities to drive returns and fixed-income investments to reduce risk. Going forward, including other investments may help you create a portfolio with the potential to endure a variety of market conditions.
Market volatility can rattle even the most committed clients. Help tame their fears.
Thinking Outside Stocks and Bonds
1The HFRX Fixed Income - Credit Index serves as a daily-priced proxy for alternative strategies that provide exposure to credit strategies. Credit strategies refers to a wide range of sub-strategies and may include corporate, sovereign, distressed, asset-backed, capital structure arbitrage, and other relative value approaches. Strategies may also include and utilize equity securities, credit derivatives, commodities, or currencies.
2POINT/Barclays Capital Indices. ©2019 Barclays Capital Inc. Used with permission. Barclays Capital and POINT are registered trademarks of Barclays Capital Inc. Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are taxable, registered with the Securities and Exchange Commission, and U.S. dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Diversification does not assure a profit nor does it protect against loss of principal.
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