Market Meltdowns | Are There Coolants?
With the financial meltdown from the fall of 2008 now nearly 6 years in our rear view mirror, this seems like a good time to revisit investment philosophy.
I have always believed in modern portfolio theory. This school of thought holds that an investor can reduce the overall volatility of his portfolio and increase return by using asset class diversification. Rebalancing is an important attribute of this buy and hold strategy.
In the midst of the 2008/2009 crisis, some financial reporters questioned the use of buy and hold strategy and even claimed the approach to investing was dead. Hedge fund strategies and alternative investment ideas were promoted alongside tactical (code for market timing) asset management.
Ironically, the past six years have favored the buy and hold investors. Hedge fund managers, tactical analysts and alternative investment managers have been soundly beaten by the S&P 500 index over the past six years.
What can we learn from this?
I believe alternative investments (Commodities, managed futures, REIT’s, Private Equity etc..) have a place in most every investor’s portfolio. These investments can further reduce a portfolio’s volatility. The key for investors is not to substitute this approach for modern portfolio theory, but to use these investments as a compliment to traditional holdings.