The late author Charles Bukowski once said that, “the shortest distance between two points is often unbearable.” The flight to safety that we have seen over the last few years is proof that this sentiment describes how many feel about investments.
The fixed income market has gotten a $700 billion boost in the last three years, and $300 billion yanked from equity markets. These are sure signs that investors have found the volatility in markets unbearable.
While the comfort of the safety bubble might calm clients of their market jitters, it isn’t necessarily in their best long-term interest. While fixed income securities are generally “safer” than equity investments, they have a downside. They may produce returns that do not keep pace with inflation.
There is, however, another option outside of the safety bubble. By incorporating alternative investment strategies that are less correlated to the markets, clients’ portfolios may be protected from downside risk, yet still capture opportunities for growth.
When clients express an aversion to the equity markets, perhaps it’s time to talk about alternative strategies like absolute return. Absolute return strategies seek to deliver a positive return regardless of market behavior. Because they typically have low market correlation, they offer some shelter to the volatility that clients find disturbing. While not right for everyone, a good absolute return fund can add balance and consistency to a portfolio.