Advisor Today - November/December 2016 - 19

PRACTICE SPECIALTIES

FINANCIAL PLANNING
By David Miller

Portfolio Allocations for New Market Conditions
The use of alternative strategies can help investors ride the wave and minimize losses in the long term.

W

e're in the midst of a
stock market plagued
by uncertainty. Global
economic ties are more fragile than
ever, manipulated global interest
rates have dimmed yields, and a once
seven-year charging bull market has
slowed to a crawl since the ring of
the New Year.
Investors with traditional
asset-allocation models of long-only
stocks and bonds are no longer
adequately positioned for risks and
opportunities. The traditional 60/40
(60 percent in equities, 40 percent
in bonds) may not be so steadfast
today, but it remains rooted in the
time-old premise: Equities drive
growth, and bonds (or similar
assets) provide more consistent,
risk-averse returns.
The business case for shifting
portfolio allocation
But in the current landscape -
where interest rates are very low and
the equity market is experiencing
high volatility - neither of those
approaches work. Instead, a small
fundamental shift in portfolio
allocation can provide security when
volatility is high. Allocating 20
percent of a portfolio to alternatives,

Allocating a portion to alternatives will stabilize high
volatility.
with the remaining 50 in equities
and 30 in bonds, provides a buoy
for the overall portfolio.
This allocation model has
historically demonstrated stronger
performance during periods of
significant stock-market declines,
compared to the traditional 60/40.
There are a few reasons for this.
First, a weight in alternative
strategies exposes a portfolio to
assets uncorrelated to the equity
and bond markets. Where the
traditional allocation utilizes
stocks and bonds as each other's
safeguard, a 20-percent allocation
to alternatives alleviates that
strong dependency.
Because of the non-traditional
investments that these alternative
strategies employ, investors
have the potential to generate
new and uncorrelated sources
of returns. This is perhaps most
important in today's market,
where traditional sources of alpha
are minimized. With so much
uncertainty, fundamental analysis
can be less reliable. Alternative

strategies often generate returns from
unique sources, allowing investors
to circumvent the sometimes
unreliability of traditional analysis.
Second, alternatives have delivered
higher returns than stocks and bonds,
with less than half of the volatility of
stocks over the last 20 years. Figure
1 and Figure 2 detail these data.
Reducing volatility exposure can
prove particularly beneficial in the
current market landscape.

Where bonds were once a
steadfast resource of low volatility,
the manipulation of global interest
rates has severely diminished this
asset's reliability. Allocating a portion
to alternatives will stabilize high
volatility, particularly those strategies
that each seek to offer uncorrelated
streams of returns and diversified
risk exposures.
Using alternative strategies
Alternative strategies tend to be
perceived as complicated in nature,
deterring some investors from diving
head first into this sector. But even
incremental investments in this
sector can still prove beneficial. A
five percent portfolio allocation to
alternatives would have historically
resulted in a portfolio with higher
annualized returns and lower
November/December 2016 | ADVISOR TODAY 19



Advisor Today - November/December 2016

Table of Contents for the Digital Edition of Advisor Today - November/December 2016

FROM THE EDITOR
VIEWPOINT
NEW PRODUCTS
I Love My Job, But I Don’t Want to Do it Forever!
Building a Practice You Love
The New American Dream
A New View of Retirement
College Education Funding: Helping Clients Evaluate What’s Best
Portfolio Allocations for New Market Conditions
Leveraging the Power of Study Groups
An Interview with MassMutual’s James Ocampo on Critical Illness Insurance
Start with “Why”
Best Practices for Selling Group LTCI
From Yes to Success
Meet NAIFA’s New President
NAIFA’s 2016 Performance + Purpose Conference
NAIFA GOVERNMENT RELATIONS
4 Ways to Build an Effective Email Marketing System
ADVERTISER INDEX
BACK PAGE
Advisor Today - November/December 2016 - cover1
Advisor Today - November/December 2016 - cover2
Advisor Today - November/December 2016 - 1
Advisor Today - November/December 2016 - 2
Advisor Today - November/December 2016 - 3
Advisor Today - November/December 2016 - 4
Advisor Today - November/December 2016 - 5
Advisor Today - November/December 2016 - 6
Advisor Today - November/December 2016 - 7
Advisor Today - November/December 2016 - FROM THE EDITOR
Advisor Today - November/December 2016 - 9
Advisor Today - November/December 2016 - VIEWPOINT
Advisor Today - November/December 2016 - NEW PRODUCTS
Advisor Today - November/December 2016 - 12
Advisor Today - November/December 2016 - I Love My Job, But I Don’t Want to Do it Forever!
Advisor Today - November/December 2016 - Building a Practice You Love
Advisor Today - November/December 2016 - The New American Dream
Advisor Today - November/December 2016 - A New View of Retirement
Advisor Today - November/December 2016 - College Education Funding: Helping Clients Evaluate What’s Best
Advisor Today - November/December 2016 - 18
Advisor Today - November/December 2016 - Portfolio Allocations for New Market Conditions
Advisor Today - November/December 2016 - 20
Advisor Today - November/December 2016 - Leveraging the Power of Study Groups
Advisor Today - November/December 2016 - 22
Advisor Today - November/December 2016 - 23
Advisor Today - November/December 2016 - An Interview with MassMutual’s James Ocampo on Critical Illness Insurance
Advisor Today - November/December 2016 - 25
Advisor Today - November/December 2016 - Start with “Why”
Advisor Today - November/December 2016 - 27
Advisor Today - November/December 2016 - Best Practices for Selling Group LTCI
Advisor Today - November/December 2016 - 29
Advisor Today - November/December 2016 - From Yes to Success
Advisor Today - November/December 2016 - 31
Advisor Today - November/December 2016 - Meet NAIFA’s New President
Advisor Today - November/December 2016 - 33
Advisor Today - November/December 2016 - 34
Advisor Today - November/December 2016 - 35
Advisor Today - November/December 2016 - 36
Advisor Today - November/December 2016 - 37
Advisor Today - November/December 2016 - NAIFA’s 2016 Performance + Purpose Conference
Advisor Today - November/December 2016 - 39
Advisor Today - November/December 2016 - 40
Advisor Today - November/December 2016 - 41
Advisor Today - November/December 2016 - 42
Advisor Today - November/December 2016 - 43
Advisor Today - November/December 2016 - 44
Advisor Today - November/December 2016 - NAIFA GOVERNMENT RELATIONS
Advisor Today - November/December 2016 - 4 Ways to Build an Effective Email Marketing System
Advisor Today - November/December 2016 - ADVERTISER INDEX
Advisor Today - November/December 2016 - BACK PAGE
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