How to Turn $100 into $90 without even Trying

Since the turn of the century, markets have been tough on investors. Through December, the S&P 500 has annualized at 4.5%, or less than half of the 10.0% that large cap stocks have earned annually going back to 1925, according to Ibbotson Associates. And to earn that 4.5%, you had to work for it, staying fully invested as your capital was roughly cut in half twice. How many investors were capable of doing that, we cannot say, but we do know that many investors fled to cash and, as a result of being beaten up with such regularity, have maintained larger cash balances ever since.

How has that worked out? Well, since June of 2008, call it mid-crisis, cash has returned about -1.1% annualized in real terms. It’s a slow erosion to be sure, something that most investors likely don’t even notice. But on a purchasing power basis, $100 invested in 3-month T-bills in July of 2008 has turned into roughly $90 after inflation today.

With inflation expectations now rising, hurting both cash and bond holdings, investors must seek out investments that at least have a chance of beating inflation by a meaningful amount, without taking on too much equity risk, given where valuations sit. Granted, 2016 was a bit of a rough year for alternatives, but Long/Short Credit, Long/Short Equity, Market Neutral, Multicurrency and Options Writing strategies all posted positive real returns, based on Morningstar category averages. The two single strategy alternative categories that failed on that measure were Bear Market (not surprising) and Managed Futures.

All things considered, there are options for investors, beyond sitting in cash, that allow them to shape the risk profiles of their portfolios to their liking. Throwing in the towel and sitting on cash can be costly.