That’s why now is a great time to consider increasing your exposure, or making your first allocation, to managed futures.
If you’re seeking more upside potential while still protecting your portfolio’s downside, you know you need to buy low and sell high. An annual portfolio rebalance is a great opportunity for investors to diversify risk—and investors can now “buy low” into managed futures.
As a true diversifier, this strategy historically delivers both lower risk and increased returns—because it takes a different kind of risk than stocks and bonds.
One way to rebalance this year
Reviewing the performance of stocks, bonds and managed futures through November 2016 reveals a pretty typical year for a properly diversified portfolio: one portion up, one down and one relatively flat.
As you can see, an investor could properly rebalance the risk of this diversified portfolio by making only modest changes. In early 2017, you could:
- Sell high: reduce exposure to stocks by 3% to potentially capture some of the gains
- Buy low: Increase exposure to both bonds and managed futures by 2% and 1% respectively to potentially take advantage of the underperformance of both bonds and managed futures
Small adjustments may drive dramatic long-term change
By sticking to a strict rebalancing routine, investors can realize better performance, lower volatility and lower drawdowns. But only if they rebalance risk by buying low and selling high once each year.
This simple discipline can potentially produce powerful results, no matter the size of the account:
With just two steps:
- Diversify risk between stocks, bonds and managed futures
- Rebalance once per year
In 2016, stocks were up, managed futures were down and bonds were flat. But in other years, like 2008, the roles were reversed. Market conditions influence which portions of an investor’s portfolio are performing—and these constantly are changing through the investment cycle.
In the face of constant change, sometimes it’s best to stick to your discipline.