Practical Applications of Portfolio Risk Mitigation without Bonds

Abstract

In <ext-link><bold><italic>Portfolio Risk Mitigation without Bonds</italic></bold></ext-link>, from the March 2022 special issue of <bold><italic>The Journal of Portfolio Management</italic></bold>, author <bold>Michael Stamos</bold> of <bold>Allianz Global Investors</bold> addresses ways investors can reduce the risks to their portfolios in today’s market. Traditionally, investors have reduced risk by allocating 60% of their assets to stocks and 40% to bonds. That worked when bond yields were positive. But now that bond yields are zero to negative, investors need alternative risk-reduction strategies. The author did a 30-year historical test of seven strategies: 1) equity plus bonds, 2) equity plus cash, 3) equity plus gold, 4) momentum-managed allocation, 5) volatility-managed allocation, 6) minimum-volatility stocks, and 7) equity plus rolling put. He found that these strategies reduced risk by an average of 30% to 40% relative to a pure stock portfolio; several reduced risk by as much as, or more than, the traditional stock/bond strategy; and some produced the same or better risk-adjusted returns. The stock/cash and stock/gold strategies provided protection similar to that of the stock/bond strategy, while the protective-put and momentum-managed allocation strategies provided strong protection against market crashes. Depending on an investor’s goals and risk tolerance, one of the seven strategies may be preferable to the traditional 60/40 stock/bond allocation.