In extreme markets, the beneficial effects of portfolio diversification can be diminished — and we’d like to add our thanks to the year 2020 for reminding us of that fact. Confronted by extreme markets, some investors persist with uncomfortably risky strategies and hope that all will somehow be okay. Other investors react with excess caution, forsaking the possibility of future gains by following an overly conservative strategy. But alternatives do exist. Tactically deploying a basket of “tail risk”1 assets can cushion against the worst of market moves while still allowing investors to continue to hold growth assets in their portfolios.
Diversification will remain a cornerstone of designing an efficient portfolio. It fulfils a role in most market conditions, delivering a smoother journey and allowing more return to be earned for the same level of risk.
However, managing the risk of extreme market events requires an explicit tail risk strategy. Such a strategy does not replace diversification, but rather complements it. The critical difference is that, while a diversification strategy is “always on,” a strategy to manage tail risk is best deployed nimbly rather than consistently.
Allocating to assets such as gold, long government bonds, and medium dated volatility futures for short periods of elevated market stress can smooth the path of returns, providing confidence to investors to retain healthier allocations to growth assets through time. The merits of each of these tail risk assets, as well as considerations on how to time such allocations, are addressed below.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-800-997-7327, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SSGA Funds.
THIS SITE IS INTENDED FOR U.S. INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States, and the information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.