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Why Most Alternatives are Ineffective

Most alternatives are taking the same risks as the rest of the portfolio.

Key Takeways

The ability to help mitigate losses is often expected of alternative investments and is rarely delivered.
Alternatives shouldn't drag down the overall performance of the portfolio, yet most have lower returns than stocks and don't help lower volatility.
An all-weather approach can potentially deliver both downside mitigation and upside returns because it combines multiple assets into a single strategy.

Transcript

Eric: Other alternatives. You know alternative investments, that phrase means different things to different people, and I have a love, hate relationship with that phrase. In fact, I would go so far as to say personally I’m not a believer in the vast majority of alternative investments.

I say that because you can look at the historical data and demonstrate that in hostile market conditions when people desperately need diversification most of these alternatives don’t hold up.

They may look different during good times, and they may look a little different during normal times, but the vast majority of them suffer from this phenomenon that we call correlation breakdown. Where when you need the diversification, they don’t stand up, they fall apart. What that means is that on some level they were taking the same structural risks that you’re taking in the rest of your portfolio.

Ninety five percent of all investable products are going to be either stock market centric, bond market centric, or a combination of the two. Now there’s nothing wrong with that, but there is room for this all-weather approach, and I think it’s going to appeal to a lot of people.

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All investing, including all weather investing, involves a certain amount of risk. The all-weather investment approach strives to distribute and control risks but may reduce the potential returns of the portfolio. While all-weather investing aims to provide stability through various market conditions, investors should be aware of the potential risks and limitations of the strategy and consider their own risk tolerance and investment objectives before implementing it.

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