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Prepare Your Clients for a Bumpy 2017

February 9, 2017

Election uncertainty and global macroeconomic issues made 2016 a volatile year for the markets. 2016 toyed with investor emotions – and retirement plans. While we may now have answers to many of last year’s political questions, the volatility isn’t over. With 2017 promising sweeping economic and political transformation both at home and abroad, if one thing is certain about this year it’s we’ll continue to see bouts of volatility that will undoubtedly impact client portfolios.

The new president espouses “Made in America.” While job growth can be good for the economy an increase in domestic production could lead to inflation, which would dampen corporate profits. When corporate profits fall, so do stocks. However, it’s unclear if or when this boom in productivity will occur. Without knowing the details of this policy there’s likely to be earnings and stock tumult.

More importantly, this election taught us that sentiment and perceived outlook can impact a market as much as economic data. Because of this, stocks can shift based on a tweet. Under a leader who is known for impulsive commentary, this can make a stock play difficult.

However, there’s good news to be had when it comes to your clients’ portfolios. Largely due to employer auto-enrollment, Americans are saving more than ever for retirement. Even better, the economy seems to be on the upswing. Investors ended the year cheering as the stock market surged to +11.96%, thanks in part to the “Trump Bump.”

As your clients invest more and more in their financial future it’s critical to find the right vehicles to capitalize on that capital. After all, what good is investing 10% of your income if the investment falls flat?

In volatile markets we have fundamentally different needs than we do in more stable times. More than “playing the market,” today your clients need a way to hedge against the markets so they don’t end up penniless when it’s time to cash out. But too many advisors and clients alike have been conditioned to think this type of protection requires a sacrifice in returns. This simply isn’t true.

When you’re thinking about hedging options, look to alternatives. Like bonds, alternatives offer diversification for portfolios with stocks. However, they can offer higher returns. Last year while US 10-Year Treasury notes hit a record low, alternatives were delivering strong returns, many over 5%. When stock markets fluctuate amid uncertainty, alternative investments often continue earning the same steady income.

Five percent might not sound like much compared to the S&P in 2016, but look at the bigger picture. In 2015 the S&P didn’t even keep up with inflation. How can you make realistic goals on that type of uncertainty, especially when we’re going into a time of heightened instability? In short, this is a conversation about consistency, and on that front, alternatives deliver.

It’s true that many alternatives have long lock-up periods, but I’m seeing more and more products with commitments as little as a year. This new era of alternatives can offer the stability and strong returns of Target Date Funds without the timeline hurdle.

Of course there are situations where alternatives don’t make sense. That’s always been the case. But the expected volatility in 2017 makes a strong case for upping your allocation to alternatives.