The recent stock market decline reminds us that risk happens fast. Bond values also dropped, meaning there was no diversification benefit between stocks and bonds, which further rattled investors’ nerves.
With the sudden resurgence in volatility, there has been, not surprisingly, a newfound interest in strategies that strive to hedge a portfolio against downside risk. These are known as absolute return strategies.
Before I became a wealth strategist serving select clients, I consulted leading wealth managers around the country on how to use absolute return managers that historically helped hedge a portfolio during bumpy times, or worse, periods like the Great Recession of 2008.
It fascinated me how financial advisors’ interest in hedging their clients’ portfolios spiked after a plunge in the stock market, which is tantamount to shopping for a seat belt after a crash.
In light of the recent market drop, I wanted to share how I’ve been incorporating absolute return managers for my clients over the last couple years in three different strategies.
I don’t offer boilerplate financial planning, so each client’s absolute return manager line-up is customized to fit their investment objectives and begins with one simple question: If the U.S. economy has a recession, would this negatively impact my client’s ability to fulfill their retirement goals?
1. Clients who are still earning income from executive positions, businesses they own, or real estate investments generally want to participate in economic growth but are not interested in beating the market.