Absolute Return: a New Strategy for a New World

As the U.S. recession enters its 17th month, stocks and bonds continue to offer little solace for weary investors – forcing them to consider alternative options.

Stocks fell a staggering 37% in 2008, and no asset class or region was immune.

In light of these circumstances, outperforming one’s benchmark – which used to be the hallmark of good performance for a traditional mutual fund – doesn’t mean much.

As a result, many investors are turning to an investment strategy that has long been used by institutional investors, but is relatively new to the retail market: the absolute return strategy, which seeks to produce positive absolute returns regardless of the direction of the markets.

Absolute return strategies can have different objectives. Many seek an absolute return target (such as 10% per year) or a range (such as 5% to 15% per year). Others seek a return above the rate of inflation or a cash rate, such as U.S. Treasuries.1

In seeking to achieve these goals, absolute return strategies typically invest in short-term cash. They can stay fully invested in cash, which may be helpful in a year like 2008. Or, as opportunities arise, they can take positions in securities spanning many asset classes – from stocks and bonds to alternatives. Unlike many traditional mutual funds, they may invest not just “long” (which means buying stocks) but also “short” (which means selling borrowed stock, then buying the stock back later when their price has, ideally, fallen).

Many such strategies are available.

Your financial advisor, who is familiar with your individual circumstances and goals, can help you determine if an investment product that uses an absolute return strategy is right for you.

  1. These examples are hypothetical and are not meant to represent the performance of any particular product.

Is Gold a Good Investment in Today’s Economy?

Investors have long considered gold a “safe haven” in times of economic, geopolitical and financial instability – conditions that are present today. The world economy has slowed dramatically. There are political skirmishes around the world. And the financial markets have plummeted.

Inflation and currency devaluation also tend to be good for gold, and those conditions are also present today. When the U.S. Federal Reserve Board (the Fed) is concerned about the economy (as it has been recently), it lowers interest rates and sells U.S. government securities, which inflates the U.S. money supply and creates excess “liquidity” in the money markets. That liquidity tends to lead to inflation, which is good for gold. It also tends to dilute, and thus lower the value, of the U.S. dollar – and gold prices normally rise with a fall in the U.S. dollar.

Not surprisingly, gold prices are high today.

The question is, could they stay high? Many investors think the Fed will stop at nothing to boost the economy, which could be bad for inflation and the U.S. dollar but good for gold.

On the other hand, the Fed is likely wary of going too far, which could create its own problems. And even if it wants to continue, at some point the Fed will exhaust the tools at its disposal. This would decrease the money supply and could lower the price of gold.

It’s something to discuss with your financial advisor., who can help you determine if gold is a good investment option for you, and if so, how you might invest in it.