Current market environment performance of dynamic, risk-managed investment solutions.
By Jerry Wagner
In investing, we’re often told that there are no guarantees. When it comes to future returns, that’s true. But from my perspective, there are at least three things you can count on. These realities affect every investor, helping shape decisions about building portfolios, managing risk, and staying focused on what matters most—even when markets get unpredictable.
Guarantee #1: The benefit and cost of diversification
Diversification is one of the most widely accepted tools for reducing portfolio risk. Combining uncorrelated asset classes or strategies can lower the overall risk of a portfolio compared to its individual components. This is a mathematical reality identified by Nobel Prize winner Harry Markowitz: By mixing uncorrelated investments, you can achieve a guaranteed reduction in measured risk compared to holding just one or two components alone.
At FPI, we believe diversification works best on two levels:
• Across asset classes (stocks, bonds, alternatives, etc.)
• Across investment strategies (trend-following, seasonality, mean reversion, and more)
Blending different strategies can add another layer of risk reduction beyond simply diversifying across asset classes.
However, diversification comes with a trade-off that investors sometimes overlook: A diversified portfolio is guaranteed not to achieve the highest return of its best-performing asset or strategy. For example, when the S&P 500 leads the pack, a diversified portfolio’s return will naturally lag the index—but it will also generally do so with less risk. Over time, that trade-off helps keep portfolios aligned with investor goals rather than chasing extremes.
Guarantee #2: The cost of buy-and-hold index investing
Index investing—putting money into funds designed to track the performance of a specific market index, like the S&P 500—can work well when markets are rising, rewarding those who stay the course through bull markets. But there’s another reality: when broad market indexes decline, a buy-and-hold investor is virtually guaranteed to participate in those losses.
Traditional diversification helps, but it has limitations. During broad market downturns, many asset classes that are usually uncorrelated tend to move together—reducing the effectiveness of diversification when it’s often needed most.
That’s where active, dynamic strategies can help. By combining multiple investment methodologies across different asset classes, advisers and investors can potentially reduce exposure to market declines while maintaining opportunities for growth. For example, a portfolio that blends strategies that employ investment methodologies such as trend-following, mean reversion, and seasonality across multiple asset classes can help create a more balanced approach.
That doesn’t mean active management ensures positive returns. Strategies can underperform, and even a dynamically risk-managed approach can lag during periods when markets rise sharply. But over full market cycles, an approach designed to adjust to changing conditions seeks to balance participation in market growth with better protection during downturns.
Guarantee #3: Risk is always with us
And that brings us to the third guarantee in financial markets: As investors, risk is always with us:
• Even conservative investments like money markets, certificates of deposit, or Treasury bills face risk, such as the erosion of purchasing power when there is even a hint of inflation or the U.S. dollar is falling.
• Bonds can be especially hazardous when interest rates are rising. This is especially so with bond mutual funds and ETFs. They have no date of maturity to bail you out eventually with a money-back guarantee.
• Alternative investments tend to perform well in certain environments, such as periods of inflation, but can underperform when market conditions don’t favor them.
• Stocks, while essential for long-term growth, can be subject to sudden downturns driven by unexpected events or shifts in investor sentiment.
That’s why it’s so important to have a plan you can rely on and a trusted financial professional to help guide you. A thoughtfully built portfolio, using disciplined and dynamically risk-managed strategies, can help you stay invested through volatility and keep your financial goals on track.
Bringing it all back to your plan
In investing, there are no guarantees about future returns. But these three truths remain constant:
• Diversification reduces risk but comes with trade-offs.
• Passive buy-and-hold strategies can leave investors fully exposed to market downturns.
• Risk is always present—no matter what you invest in.
Understanding these realities is why I believe it’s essential to work from a plan that can adapt as markets change. Partnering with an adviser who uses a disciplined, dynamic approach gives you a framework for staying focused on your long-term goals—even when conditions get unpredictable.
Markets will rise and fall. Strategies will have good stretches and challenging ones. But with a thoughtful, flexible approach, you can stay focused on what matters most: working toward your long-term objectives without getting lost in the noise of the moment.