Maximizing the Return on Your Year-End Bonus

Bonus season has arrived. And there’s just one question on all of our minds: How can prudent investors earn an attractive rate of return without taking on too much risk?

We are living in an unprecedented time for the economy and financial markets. The equity markets have been volatile, with investors experiencing a long-awaited correction earlier in 2015 (defined as a decline of 10% or more). Interest rates are near zero. The Federal Reserve has an unheard-of amount of assets on its balance sheet as the result of quantitative easing. Banks are holding considerable reserves. There are fears of China’s slowing economy, which may impact global demand. The Fed is contemplating an interest rate increase, but what effect will it have on the economy and the financial markets? And when will the Fed ever seek to reduce its unsustainable balance sheet?

Traditional theory tells us that it’s conservative to invest 60% of our portfolios in equities and 40% in fixed income. The “60/40” theory was developed by investors and financial advisors during a 30-year period of declining interest rates. During this period, fixed income has been relied upon for yield and stability (and maybe even some capital gains) in an investor’s portfolio. Currently, fixed income yields are near zero and instead of stability, bonds may be exposed to the risk of declining valuations as rates rise, whenever that may be. Remember, rising interest rates equate to a loss in market value of any fixed income securities you hold.

As a result, you may want to seek opportunities outside of traditional asset classes. Although alternative investments can be more complex, they may offer an uncorrelated or risk-controlled return driver to an overall portfolio, improving the risk-adjusted rate of return over time. Previously, alternatives may only have been available through hedge funds with high fees and high minimum investments. However, today there are numerous high quality “hedge-fund-like” offerings available in mutual fund format referred to as “liquid alternatives.” Maybe the “new 60/40” should be something more like “50/30/20,” with“20” being liquid alternatives.

We may not be able to rely on equities for strong returns or fixed income for yield and stability going forward. Further portfolio diversification through liquid alternatives may be just the thing you need. An experienced financial advisor from Beacon Trust (Provident’s wealth management subsidiary) can help you make informed decisions about investing the rewards of your year’s toil— while managing risk, budgeting, saving for education and retirement, and tax planning. Now that’s a bonus!

To contact a Beacon financial advisor, please call us at 866.377.8090 or visit our website at www.beacontrust.com.