As investors approach retirement, he says, they can consider reducing their equity exposure by 5 percent (to begin with) and allocating towards guaranteed income products instead, such as immediate annuities, which creates a stream of income during retirement.
“The same rules apply today as they did before the crisis in many ways,” says Herman. “We feel strongly that the average investor can and should embrace the new offerings of absolute- return funds and hedge fund-like strategies for a portion of their portfolio.”
Absolute-return funds seek to produce a positive return in all market conditions by owning unconventional assets, which are not permitted in traditional mutual funds, such as futures contracts, options and derivatives. They also employ investment strategies such as short selling and arbitrage.
Under the alternative asset umbrella, says Kevin Gahagan, a principal with Mosaic Financial Partners in San Francisco, commodities can play a valuable role in the average investor’s portfolio, since they help hedge against inflation.
For those looking to gain exposure, but unsure how to break into the market, he notes, commodity index funds are a good point of entry.
Just make sure the fund is widely diversified, rather than industry-specific, which tend to be more volatile.
Keep Cash Separate
Though cash holdings are paramount for all long-term savers, Herman notes it should not factor into your investment portfolio until you reach retirement.
“Cash liquidity is important but that’s something you need to maintain outside of your portfolio” he says.
If the set-it-and-forget-it investment approach has lost its appeal since the Great Recession, as it has for many, there’s one way to become more tactical with your portfolio without treading too close to the slippery slope of market timing—rebalance on a regular basis.
Over time, especially during volatile markets, the market’s ebb and flow will deliver varying returns for the assets in your portfolio, throwing your target allocation out of whack.
The best way to rebalance is to sell a percentage of your best performing stocks or bonds, and put the proceeds into asset classes that are now underweight.
“I’m in favor very much of standard asset allocation,” says Hammond. "These days you want to review your portfolio once a year. You may not want to make any changes, but you want to review it.”
You can also dampen the effects of volatility by practicing dollar-cost averaging, says Hammond, the tried and true strategy of buying into the market at regular intervals—thus ensuring you buy some of your stocks low and some of them high.
In today’s turbulent market, it’s more important than ever to stick with asset allocation models that stand the test of time.
Likewise, says Hammond, Main Street investors who are considering more risky market timing strategies need to remember to keep their eyes on the prize.
“If you’re saving for the long run, what you’re really trying to do is create an income for yourself in retirement,” he says. “A lot of times people forget that. The advice out there says you want to maximize your returns and create wealth, but that’s only a means to an end and the end is creating financial security in retirement.”