Finding better investment trade-offs: new solutions for mitigating risk

The traditional approach to asset allocation relies on equities for growth and bonds for risk control. If a classic mix cannot deliver a return goal at an acceptable level of risk, investors face two unappealing choices. The first is simply to become more tolerant of risk; the second is to forego return, which requires investors to scale back on their spending or postpone their retirement. But a third, more attractive path for investors does exist: adopting a range of risk-management strategies that offer better trade-offs than the conventional approach. An accepted tenet of investing is that reward and risk go hand in hand: the more investors want the former, the more they will need to accept the latter. Challenging periods for stocks can be prolonged by long-lived hostile conditions. Research-based tactical adjustments to asset allocation complement insurance as a short-term risk strategy. This strategy deserves skepticism; after all, investors are notoriously poor at timing decisions.