“When the market drops and the equity loses value, the put option increases in value, and vice-versa,” according to Swan Global Investments. “This counter-balancing investment approach is engineered to not lose big.”
This alternative diversification and yield-generating approach may also help fixed-income investors broaden their portfolios. After a three-decade long bull run in the fixed-income space, investors are more exposed to turns, especially with the Federal Reserve eyeing higher interest rates and a tighter monetary policy ahead.
“Traditional fixed-income help capital preservation and yield generation, but going forward, you need to choose one or the other,” Odo warned.
Odo cautioned that the traditional 60/40, stock/bond split may no longer generate the necessary returns that many have grown accustomed to and may now pose greater risks for investors. For instance, given the traditional portfolio, the currently paltry 2% yields in fixed-income would require the equity portion to generate around 12% to provide adequate returns, but the bull market in equities is beginning to slowdown.
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