With the Stanley Cup playoffs approaching, NHL teams made last minute roster moves in March to bolster their defenses and add to their offensive firepower.
In the same way, investors and advisors may make trades with a particular opponent in mind, but inevitably, that opponent is also making roster changes; the opponent faced during the regular season will not be the same in the playoffs.
In the almost six years since the stock market hit its nadir, stocks have performed exceptionally well. From March 2009 through February 2015, investors benefited from annualized returns of almost 22% for the S&P 500. Number “60” has performed admirably but is getting fatigued and, to be honest, was really just making up for the 57% loss during the financial crisis (based on daily returns). Defense, as they say, wins championships, and protecting against future drawdowns may be increasingly more important than keeping up with the (Dow) Joneses.
So how to construct a portfolio at this stage with an offense that can generate meaningful real returns and a defense that can take the punishment of turbulent equity markets or rising rates?
Diversification is key, but investors have misconceptions about the concept. The “60” in a portfolio can’t be adequately diversified with long-only assets.
On the other hand, for the “40” in a standard portfolio, investment-grade debt (particularly Treasuries) is a true diversifier, and can provide downside protection. But investment-grade debt has little chance of generating a positive real return. With that in mind, what options do investors have?