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Generating Returns While Protecting Portfolios From a Crash

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Today’s financial markets may be among the most difficult markets in modern history.

Domestic stocks are in the seventh year of a bull market whereas the average bull lasts five to six years. Because stocks have continued to trend higher for so long, there is a growing sentiment that the other shoe may be about to drop. Moreover, there are a number of good reasons to support this. First, we have the crisis in Greece and southern Europe. Next, there is the recent meltdown in Chinese stocks. Finally, the amount of global government debt is absolutely staggering. There are numerous other factors, but it’s clear to this author that the evidence for a significant stock market decline is mounting. As Benjamin Graham once noted, as stocks continue to rise, the risk of a decline increases while future return prospects decrease. In light of these facts, how can you generate returns and protect the portfolio at the same time?

In my view, the more obvious advice would include buying high-quality, dividend-paying stocks and funds after a decline, while using stop orders to protect the downside. Also, Europe has been good to investors this year. However, Europe’s near-term prospects depend heavily on the outcome in Greece, and then perhaps Italy, Spain and Portugal. Japan is another area where stocks have performed well this year, but it also sports the highest debt-to-GDP ratio of any country in the world. Where can investors find returns beyond stocks? Alternative investments should be considered. In general, I categorize investments such as real estate, long-short equity, commodities, currencies, managed futures and a few others as alternatives.

This past week I had a rather lengthy conversation with Ware Bush, Director of Aspen Partners Ltd., an organization founded in 1996 that provides alternative investment solutions to financial professionals seeking diversification. I must say that over the years, there has been a small group of individuals with whom I found conversation to be both stimulating and informative. Bush would certainly be included in this group. We discussed a variety of topics, including the Aspen Managed Futures Strategy fund (MFBTX). This fund has done well in recent years.

I have not always been a fan of managed futures. In the years leading up to, and including the crash in 2008, managed futures did well. However, over the next four years the category performed poorly. More recently though, they have rebounded. Because management strategies vary greatly among managed futures funds (some add significant risk), I recommend calling the fund company to get the particulars. If you do, ask about their management style and what type of market conditions are best and worst for their fund.

Managed futures can help boost returns and provide diversification for a portfolio. Perhaps we’ll continue this discussion next week.

Until then, thanks for reading and have a great week!

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