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Lately, I have noticed more and more investors avoiding making any changes to their portfolio. Where did that avoidance come from? Is it an irrational fear, fear based on real causes, is it new, has it been there all along or are some of us simply stuck in a rut that we can’t get out of?

Let me introduce you to ‘metathesiophobia’, an irrational fear of change. Somewhere along the way, people started to believe that the best course of action is to not change course at all. (Boaters know this can be disastrous.) While some “steady as she goes” approaches take the cake, they also could be leaving the individual in a precarious situation. Why is it that investors are becoming more and more comfortable with little diversification from their traditional stock investments? Where does that leave YOU?

As an investor, you owe it to yourself to have all of your diversification options explained to you. You deserve to have the tools and information made available to you, with a proper explanation. Given that the most recent market correction is being compared to the crash of 2008, it is important to know your choices.

Click image to View – Chart Courtesy of Moore Research, Annotations by Foremost Trading

Here are two charts, (click images to view) one shows the major spikes in the CBOE Volatility Index and how it corresponds to different world events. The second chart is the Autumn Gold CTA (commodity trading advisor) Index, January 2000 through July 2015. Why are these significant you ask? Great question, these charts are important because they show that while these spikes in volatility negatively affected stock markets, another asset class (managed futures) was not nearly as affected.

 

AG CTA Index

Click image to view

What if I were to tell you there is a seldom discussed asset class that is not generally correlated to stocks, and that it actually performed well in 2008? How would that change the way you feel about managed futures? Would you be relieved, maybe even a little intrigued or interested in investigating further? The Chicago Mercantile Group (CME) published a piece entitled: Litner Revisited Quantitative Analysis where it demonstrated that the performance of BTOP 50  (there are 20 funds in the Barclay BTOP50 Index) during the worst 15 quarters of S&P 500 Index. The paper “illustrates that CTAs have historically capitalized on the various forms of volatility which accompany market dislocations, be they sustained trends consistent with a flight to or from quality, shorter-term choppy price action, or sudden reversals associated with rapid swings in sentiment explained by market psychology and behavioral finance.” The paper “provides a compelling reason to include managed futures in a diversified portfolio. “Black Monday” in 1987, the events leading up to the Persian Gulf War in 1990, Long Term Capital Management and the Russian Crisis in 1998, the burst of the tech bubble and ensuing recession in 2000-2002, the credit crunch and commodity run-up of 2007-2008, and the European Sovereign Debt Crisis, all serve as examples of market dislocations during which the performance of equities suffered and managed futures strategies performed well”. See the actual link to this piece for more information: Litner Revisited.

Let’s take a look at how your portfolio could potentially benefit from reallocating just 20% from stocks and bonds into managed futures. In the provided chart it is easy to see that a portfolio which included managed futures outperformed a portfolio which included only stocks and bonds. Note: adding managed futures to your portfolio cannot protect you from loss and in fact can decrease a portfolio’s efficiency. Past performance is not necessarily indicative of future results. Untitled
*Stocks are represented by the S&P 500 Total Return Index from December 1990 to the end of Data and by the S&P 500 Price Index adjusted for dividends from January 1990 through November 1990. The S&P 500 indices are designed to reflect all sectors of the U.S. equity markets. The S&P 500 includes 500 blue chip, large-cap stocks, which together represent about 75% of the total U.S. equities market. Companies eligible for addition to the S&P 500 have market capitalization of at least US$3.5 billion. The TR Index accounts for the reinvestment of dividends. Bonds are represented by the Barclay’s US Aggregate Bond Index (formerly known as the Lehman US Aggregate Bond Index). The U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS. The U.S. Aggregate rolls up into other Barclays Capital flagship indices such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt. The U.S. Aggregate Index was created in 1986, with index history backfilled to January 1, 1976. Managed Futures are represented by the Autumn Gold CTA Index. The Autumn Gold CTA Index is comprised of the client performance of all CTA programs included in the AG database and does not represent the complete universe of CTAs. CTA programs with proprietary performance are not included. Monthly numbers are updated until 45 days after the end of the month. Autumn Gold CTA indexes are non-investable indexes compromised of the client performance of CTA programs included in the Autumn Gold database and do not represent the complete universe of CTAs. Investors should note that it is not possible to invest in the Autumn Gold index. Actual rates of return may be significantly different and more volatile than those of the index.

Don’t let yourself become tangled in the grips of Metathesiophobia. Here at Foremost, we have the tools necessary to help investors make an educated decision regarding their individual portfolio and investment needs. Call us today to learn how you and your portfolio may benefit from our services. Check out our Managed Futures Database.

Cited in the article: Bloomberg article

The Foremost Trading Team

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Disclaimer: Trading futures, options on futures, retail off-exchange foreign currency transactions (“Forex”), investing in managed futures and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. This website contains information obtained from sources believed to be reliable, but such information has not been independently verified and its accuracy is not guaranteed by Foremost Trading. Past performance is not necessarily indicative of future results. Any mention of performance in any context whether actual or hypothetical is no guarantee of future results. Foremost Trading became a registered ‘dba’ of RCM Alternatives in July of 2020. Please see full disclaimer here: https://www.rcmalternatives.com/disclaimer/