By Sylvia Kwan, Ph.D., CFA, CAIA, is the Chief Investment Officer at Ellevest.
In the investing industry, TINA is an acronym that stands for There Is No Alternative (to stocks). With bond yields so low and cash earning close to zero, investors seeking financial returns feel that they have nowhere to go but stocks. The TINA strategy is often cited as one of the main reasons why US equities stay popular enough to drive continued gains in the markets.
And so far this year, that’s the way the markets have panned out.
The S&P 500 rose in August for a seventh consecutive month, gaining 2.9%; meanwhile, the DJIA rose 1.2% and the NASDAQ rose 4.0%. Federal Reserve Chairman Jerome Powell’s remarks last Friday helped ease investor concerns about rising inflation and add color on when the Fed might scale back on easy money policies and/or raise interest rates. With the S&P 500 up more than 20% so far this year, experts are predicting a strong finish to 2021, even if the ride from here on out turns out to be bumpy.
So … should you invest more in stocks?
It’s easy to focus on just the upside as markets keep notching record highs and the economy recovers from the impact of the pandemic. And investors tend to take on more risk (aka invest more in stocks) when markets are up — because it just doesn’t feel risky. And if not equities, what? (TINA!)
But times like this — when we tend to be complacent — are exactly when you should be thinking about how you can better position your investment portfolio for the possibility of volatility and challenging markets ahead. (Trying to make good decisions amid market turmoil is like preparing for a hurricane in the middle of one.) And that doesn’t mean taking on more market risk.
Over the long run, successful investing isn’t just about positive returns and potential upside. Your portfolio’s ability to withstand downturns is equally, if not more, important. That’s because if you lose less during a downturn, you’ll need less time for your portfolio to recover, and you’ll have more capital for future growth. How well your portfolio withstands downturns and how quickly it can bounce back is a measure of its resilience.
There is an alternative to TINA.
And (no pun intended) they're called alternatives: non-traditional investments that aren't stocks or bonds. Some alternatives are liquid and offered as mutual funds. Others are privately offered and may only be available to accredited investors. At Ellevest Private Wealth, alternatives include assets like direct real estate, renewable energy, and private debt — not hedge funds and derivatives. We intentionally seek alternatives with sources of risk and return that have very low correlation with those of stocks and bonds.
When they’re carefully and intentionally chosen, alternatives can diversify your portfolio and help expand its capacity to endure challenging market conditions. So when — not if — the market corrects or turns south, investments that rely on different determinants to earn returns (like demand for affordable housing or electricity generated by renewable energy assets) can help give your portfolio not only stability during market distress, but also the opportunity for greater returns, too.
Sounds like a free lunch?
Well, not quite. Many alternatives that have the diversifying and differentiating properties Ellevest seeks are also illiquid and require holding periods of five or ten years (or more) and typically have higher fees. Plus, even though they don’t carry the same risks as stocks and bonds, alternatives carry their own specific kinds of risk. But if you’re a long-term investor, as we are at Ellevest, and you have the capacity to invest in illiquid investments, the diversification and potential returns they offer can be worth it.
In short, TINA can be a winning strategy so long as stocks keep going up. But we can’t count on that to continue. Alternatives — particularly those with differentiated risk and return characteristics — can help add resilience and non-correlated sources of returns in both strong markets and weak ones.
To learn more about how Ellevest builds portfolio resilience, check out their white paper.
About the Author:
Sylvia Kwan has a Ph.D. & is a CFA® and CAIA® charterholder. She oversees Ellevest portfolios, algorithms and investment recommendations. She competes in triathlons and loves ice cream.