Jekyll or Hyde: What Kind of Investor Will You Be?

Jekyll or Hyde: What Kind of Investor Will You Be?

A meaningful alternatives allocation can curb our base instincts

By Longboard Staff
Category: Diversification

The Strange Case of Dr. Jekyll and Mr. Hyde is a classic horror tale about a physician who tries to control his dark side by concocting a magical potion. But Dr. Jekyll’s good intent goes awry and he unleashes a monster who is devoid of logic and bent on fulfilling his base urges.

If we’re honest with ourselves, we can admit that most investors embody both Jekyll and Hyde. When the market goes our way, it’s easy to be a man of virtue. But when volatility strikes, we’re overcome by the urge to sell low and buy high even though we know this behavior will ruin our returns over the long term.

True diversifiers defined

Luckily, unlike the good doctor in our story, we can cure the monster by learning more about which assets truly diversify our portfolios. Longboard research suggests that many financial advisors are concocting their diversification potion by adding REITs to their portfolios.

We believe this a dangerous, but understandable mistake. These advisors simply don’t have all the facts on creeping correlation. REITs are nearly 60 percent correlated to the stock market. Adding them just feeds the beast.

Under the microscope, there are only three asset classes that historically have delivered true diversification – meaning they reduce risk and add returns in declining markets. Those assets are gold, MLPs and managed futures. These uncorrelated assets help you balance your traditional portfolio and can help lessen the effects of volatility so you can stay focused on long-term appreciation.

Meaningful alternative allocations

But there’s a catch. You simply can’t dabble in true diversifiers, you have to commit. It takes a shot of at least 20 percent of your portfolio dedicated to true diversifiers over a full market cycle to provide the long-term inoculation that most asset managers seek.

This is where that primal fear can kick in. No one likes needles, but the choice is yours. Stay Jekyll, an investor who conquers emotional decision making and enjoys calm confidence in any market conditions.

Or go full Hyde, and accept that the road ahead will be wild and unpredictable.