Behavioral finance has shown that investors loathe losses about three times more than they love gains. In other words, experiencing the pain of a loss is graver than the gratification of winning an equivalent gain. This is the concept known as “loss aversion,” and it is one reason that we believe establishing an appropriate amount of portfolio risk is important.
We believe alternative strategies can be a significant source of risk reduction in a portfolio. For instance, alternative strategies have the potential to capture some of equities’ upside with comparably smaller downside potential. Historically, alternatives strategies have achieved over 30% of the S&P 500’s monthly gains, with only 13% of its monthly losses.
