When the worst financial crisis in decades hit in 2008, even
a diversified “60/40” portfolio lost as much as 23.69% 1 of its
value. It was a wake-up call to investors who discovered that
diversifying their portfolios between stocks and bonds didn’t
deliver the protection they anticipated.
Although correlations were already on the rise leading up to
the broad sell-off, the severe market turmoil caused most
asset classes to become even more correlated. There’s been plenty
of volatility since, and given current geopolitical uncertainties
and the potential for other systemic risks such as a global
recession, we believe there is no reason to think that a traditional
diversification approach can spare investors in the future.
Averages don’t lie but they can mislead
Indeed, while long-term averages show stocks have generally
delivered positive returns and provided investors with the greatest
opportunity for gains over long periods of time, they fail to reveal
the large variations within any year and from one year to another.
On a daily basis, down markets may occur as often as up markets
Source: Bloomberg Data and Federated Investors.
Percentage of days the markets are positive and negative.
Data from 12/31/1999-6/30/2016. For illustrative purposes only and
not representative of performance for any specific investment. Past
performance is no guarantee of future results. In exchange for their higher
growth potential, stock prices are more volatile than those of bonds.
U.S. Treasury Bonds, unlike stocks, are guaranteed as to the payment of
principal and interest by the U.S. government, if held to maturity.
The problem is it can be hard to make up for lost ground, as the
rate of return required to recoup a loss is always greater than the
loss itself. For example, if you start with $1,000,000 and lose 20%,
you are left with $800,000. To determine what percentage gain
it would take to recover your loss, divide your starting capital of
$1,000,000 by your ending amount of $800,000. You get 1. 25—
meaning you must make 25% on your $800,000 just to get back
to your starting amount of $1,000,000.
In other words, it can take years to recover from downside
volatility, as many investors discovered in the last 20 years, when
the S&P 500 experienced two severe drops—49% early on during
the dot-com collapse, and 57% during the global financial crisis—
that devastated many portfolios. With portfolios so frequently
subject to the damaging impact of down markets, there’s good
reason to consider an allocation to alternative investments that
have the potential to reduce volatility and lessen downside risk.
Federated’s approach to alternative investing
Although the concept of alternative products as a “fourth asset
class” is relatively new to investors, Federated Investors has had
a focus on such products for more than 15 years. Active risk
management and risk-versus-reward analysis are the guiding
principles of Federated’s alternative investment approach. This
approach involves an investment discipline that includes
bottom-up fundamental security and industry research paired
with top-down credit, global macro insights, market liquidity
and policymaking analysis, and the daily use of downside risk
Federated alternative strategies are subject to stringent regulatory,
fiduciary and disclosure requirements, offering investors
transparently managed, liquid and cost-effective access to a wide
range of strategies designed to limit downside risk while seeking
S&P 500 10-Year U.S. Treasury
Alternative investments seek to ease volatility’s sting
ee e rat d d
1 The max drawdown in 2008 consisting of a portfolio combination of 60% S&P 500 and 40% Barclays U.S. Aggregate Bond Index. This example is for
illustrative purposes and is not representative of any specific investment. Actual investments cannot be made in an index.
Past performance is no guarantee of future results.
Alternative investing, including use of futures, options and short positions, may involve risks different from or possibly greater than the risks associated with
investing directly in securities and other traditional investments.
G46047-05 (12/16) Federated is a registered trademark of Federated Investors, Inc.
Federated Equity Management Co. of Pennsylvania 2016 ©Federated Investors, Inc.
Mike Dieschbourg, managing
director for the Alternatives/
Managed Risk Group at
Federated Investors, talks
about why alternative investing
strategies are gaining increasing
traction with investors.
For more information contact: firstname.lastname@example.org
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