04/23/2015

Joe Halpern Published in NASDAQ and Wealthmanagement.com: Thoughts on Dealing with Volatility and a Lengthy Bull Market

With market volatility picking up in recent months, coupled with a bull market that is now 6 years and running, a few themes have been top of mind with the investing community. I wanted to share a number of recent articles that I’ve published touching on some of these themes and the relevant role of defined outcome investing.

Wealthmanagement.com as well as Nasdaq published Beyond Active vs. Passive: A Third Way for Investors, an article in which I explore how the lines have blurred between active and passive investing, driven by the new wave of more sophisticated indexes that have recently hit the market. Defined outcome investing is one of those strategies. The use of rules-based defined outcomes to achieve Alpha provides an alternative to actively managed solutions. Traditionally, investors choose between Alpha-seeking active managers and passive rules-based solutions which deliver beta or some variation thereof. The prevailing wisdom is that in straight up markets passive is the way to go but when markets get choppy, active managers often outperform. Defined outcome investing provides a rules-based solution which can lead to successful market navigation regardless of clear or choppy conditions, with lower fees and less human subjectivity than traditional active management.

Financial Advisor ran an article titled You Can’t Buy Market Insurance, but You Can Protect Your Portfolio.  In it, I discuss how individuals purchase insurance for just about all major facets of their lives with the exception of their market investments. The use of options strategies offers a method of attaining a level of protection on their investments. Traditionally, market equity protection was sought through diversification, often into less risky but also less productive asset classes such as fixed income (e.g., the 60/40 equity/bonds split).  A more recent generation of equity protection solutions offers market timing algorithms and low beta investing – several of these strategies have been effective in some years, less so in others, but they don’t offer a predictable level of protection.  Enter defined outcome investing, which comes much closer to offering consumers what they are used to seeing in their home, health, and life insurance policies.

Investment News published Investors can Control Volatility, but the Tools are not for Novices.  In it, I discuss how low volatility products mitigate, but do not actually eliminate, downside risk. Defined outcome solutions provide a controlled level of exposure while largely eliminating downside risk.  Building a defined outcome strategy requires the use of options, which can be challenging for many investors to effectively do on their own.   Therefore, “outsourced” solutions such as structured notes and mutual funds can be more fitting for most investors.

By combining a) rules-based investing and b) options-based strategies, an asset manager can create a defined, predictable and risk-controlled investment outcome that provides market exposure while allowing you to still sleep well at night.

There are several ways to access the defined outcome solutions I reference in these articles, ranging from traditional structured notes to the exchange based solutions we offer at Exceed. Go forth and find the right solution.

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