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True Diversification

The number one rule of investing that everyone seems to know, is diversify, diversify, diversify.  For most investors, this starts with an allocation to stocks and bonds, diversifying the risk and return of their portfolio over two different asset classes.  Other asset classes can further diversify portfolios, such as precious metals, real estate or timber.  These other asset classes can be thrown into the very broad asset class called alternatives.  The easiest way to define alternatives is an investment that produces returns by taking risk other than equity and bond risk.

Investors seek alternative investments to provide returns while being uncorrelated to stock and bond returns.  This is especially valuable in challenging environments when stocks and bonds may produce negative returns.  By adding alternatives that are negatively correlated to stocks and bonds to a portfolio, one can truly diversify their portfolio and add return over the long-term.

 

 

December 31, 1999- June 10, 2016 Stocks Stocks and Bonds Stocks, Bonds & SG Trend Index
Annualized Return 4.2% 5.0% 5.5%
Annualized Volatility 15.0% 9.0% 7.7%
Worst Month -16.8% -11.0% -7.6%
Worst Decline -50.9% -32.5% -24.8%

As the table above shows, by adding a true diversifier such as the SG Trend Index (managed futures), which is negatively correlated to traditional asset classes,   an investor can reduce their portfolios volatility and over the long-term increase their returns.  Boston Asset Management looks to actively diversify the sources of return and risk in your portfolio, while we endeavor to generate solid long-term performance

Over time, a portfolio with lower volatility will have a higher average return than a portfolio with the same expected return but higher volatility.  When downward equity market volatility occurs (losses in the 10%-20% range) the value of this diversification will become very evident.  The better your portfolio is diversified, the better it will survive such a painful period.

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