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.
Source: Bloomberg and GSAM. Analysis is based on chart data from January 1990, earliest common inception, to December 2018. Alternative strategies refers to the HFRI Fund of Funds Composite Index (HFRI FoF). The Upside/Downside Capture Ratio here measures the degree to which an investment outperforms or underperforms the S&P 500 in times of positive/negative market performance. HFRI and related indices are trademarks and service marks of Hedge Fund Research, Inc. (“HFR”) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR’s website and other public sources and is provided for comparison purposes only.
By deploying alternative strategies in a broadly diversified portfolio, investors can seek to improve the chances of meeting long-term goals for their portfolios by reducing long-term risks.
Source: Goldman Sachs Asset Management/Strategic Advisory Solutions Portfolio Strategy. Median returns and volatilities for 10-year rolling periods from January 1, 1990 to December 31, 2018. Past performance does not guarantee future results, which may vary.