Are Alternatives Substitute For Equities?

The Washington Post had an article about compounding stressors from everyday routine leading to serious health problem. By everyday routine, they were talking about things like commuter traffic or just generally running late. The article implied that only big, life-event stressors like spouse dying could be harmful so if routine stressors are new for being harmful then I am not surprised.

The idea of reducing stress by placing yourself in fewer stress-inducing situations resonates with me personally and professionally. Personally, in that, I have been working from home since my mid-thirties so no traffic and far fewer frustrating encounters with people at the office and professionally in that I have long advocated using diversifiers (now called alternatives) to manage portfolio volatility. We know that volatility causes people to reach a breaking point where they do self-destructive things, portfolio-wise. Managing volatility provides the opportunity to put clients in fewer situations where they might reach their breaking point.

Related to the above about portfolio strategy, Larry Swedroe’s latest at ETF.com is titled Active Alts Don’t Outperform. Larry has plenty of numbers to make his case that they don’t outperform in nominal terms, but they do have lower standard deviations than equity funds. He seems to also be saying they don’t outperform on a risk-adjusted basis. The article focused on long-short equity and market neutral.

If I am reading him correctly, I think he is framing the function of alternatives incorrectly on a couple of different levels.

We’ve said here countless times that equities are the asset class that goes up the most, most of the time. Any other asset class exposure is likely to underperform equities most of the time. This includes bonds, commodities and various alternative strategies. These other asset classes by virtue or their standard deviations, correlations to equities or both can help offset some portion of the volatility that goes with whatever portion is invested in equities.