Holdings That Help Reduce Portfolio Volatility

Holdings That Help Reduce Portfolio Volatility

As you are probably aware, the market has struggled this week.  In face, this is the worst performing week for the Dow Jones Industrial Average since 2011.  There are many causes for this.  The primary concerns are global growth, signs of deflation, oil prices, and China.  During times like these it’s important to focus on things that we can control.  This includes asset allocation, having a proper financial plan in place, and staying disciplined to an investment strategy.  We try our best to construct portfolios that minimize volatility.  Some common client holdings that help achieve this are:

1. Managed Futures: Historically, managed futures perform very well when a market has a prolonged sell off.  These investments might not show this over short term pull backs but in a longer term downward trend, they often are positive. For example, in 2008 most managed futures accounts were up over 20%.


2. Stoneridge Catastrophe Bond Funds:  The performance of these funds is driven by weather and other natural events not stock prices, interest rates, etc.  There is next to zero correlation to these funds and the overall market.


3. Collars: Many of our clients own collars where we purchase individual stocks and buy insurance (put option) to protect the downside.  In a market pullback, this strategy might lose money but it will typically be no more than 4%.


4. SPY IPOM:  This strategy sells options against the S&P 500.  For every dollar we make in selling options we receive a dollar hedge against a pullback.  This strategy does not offer the protection of collars but it has reduced the volatility of the S&P 500 by approximately one third.


5. Annuities: Some clients own annuities in their portfolios.  Most annuities offer protection against down years in the market.


6. Other Fixed Income: When stocks sell off, there is usually a “flight to quality” with money moving to bonds.  This tends to move bond prices higher.


7. Private Real Estate: Many clients are in the commercial real estate fund (Vista Capital Fund) or other private real estate funds we have offered over the years.  Others have direct ownership of properties.  These holdings also offer diversification.


Owning some or all of the investments mentioned above does not guarantee that you will not lose money but it should reduce downside volatility and over time offer risk adjusted returns that help you accomplish your financial goals and objectives.  Past performance does not guarantee future results so we can not guarantee these holdings will help.  However, we believe in diversification and it is times like these that our investors benefit from it.

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