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Written by: Direxion
If you understand the purpose of including alternatives in your investment portfolio — seeking improved risk-adjusted returns — you almost certainly understand that your chances of predicting when markets will move up or down is slim to none.
Indeed, the past few years has seen the stock market climb steadily as investors execute a risk-on trade fed by continued encouragement from Fed policy, European Equity Market, and slow growth in the U.S.
But once you step back and take a look at the bigger picture, your perspective on where the equity market is, and what direction it’s heading in next, may change. The S&P 500 Index has soared to unprecedented levels.
Of course there are dozens of arguments, both technical and fundamental, for how long this trend will continue. And likewise, there are dozens of arguments for when the trend will reverse. But one thing’s for sure. Though many will make a living pondering WHEN the next down market will occur, no one will argue IF it will occur.
Consider This
Over time, alternative asset classes like commodities deliver a significant degree of non-correlation to both the domestic and international equities markets. When used to complement a portfolio of stocks and bonds, commodities may improve risk-adjusted returns.
Commodities offer true diversification away from equities. That non-correlation, and independent return streams can potentially act as buffer for weathering the next market storm.
If you developed a pit in your stomach during the last stock pullback, now is the time to consider commodities for your clients with substantial assets.
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All data as of 12/31/20161Correlation – A statistical measure of how two securities move in relation to each other and ranges between -1 and +1. A correlation of +1 indicates the two returns move perfectly together, 0 indicates movements are random, and -1 indicates opposite movements.
Source: Bloomberg. Indices: Bonds - Barclays Capital U.S. Aggregate; Emerging Markets - MSCI EM Index; Developed Markets - MSCI EAFE Index; REITs - FTSE NAREIT All Equity REITs Index; Commodities - Dow UBS Commodity Index; Hedge Funds - HFRI Fund Weighted Hedge Fund Index; U.S. Equities - S&P 500 Index.
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