Crossover investing strategies aim to capitalize on the strengths of different asset types while minimizing risks. By diversifying into various uncorrelated assets, investors can smooth out portfolio volatility and improve risk-adjusted returns. However, not all crossover strategies are created equal. Investors need to carefully assess correlation, risk-reward profile and implementation costs for optimal results. This article discusses examples of effective crossover strategies and provides guidance on constructing a robust multi-asset portfolio.
Allocating between stocks and bonds
A basic crossover strategy is allocating between stocks and bonds to balance growth and income. stocks offer higher long-term returns but are more volatile. Bonds provide stability but yields are lower. By holding an appropriate mix, investors can achieve risk-adjusted returns exceeding those of individual assets. The optimal stock-bond ratio depends on risk appetite, time horizon, etc. Younger investors can allocate more to stocks, while retirees may favor more bonds.
Adding alternative assets like commodities
Investors can further diversify by incorporating alternative assets like commodities. Assets like gold and oil tend to be uncorrelated with stocks and bonds, providing avenues for risk reduction. A small 5-15% allocation to commodities can significantly lower portfolio standard deviation. However, alternatives come with higher costs and complexity. Investors must weigh implementation tradeoffs against diversification benefits.
Implementing crossover strategies with funds
For individual investors, the easiest way to implement crossover strategies is by using mutual funds and ETFs. These provide instant diversification and professional management. For example, target date funds hold combinations of stocks, bonds and alternatives suited to different investment horizons. Balanced funds maintain preset stock-bond allocations. To optimize implementation, investors should favor low-cost, passively managed funds over expensive active products.
Rebalancing periodically
Maintaining target asset allocations is crucial for crossover strategies. As prices fluctuate over time, weightings will drift from initial levels. Rebalancing trades assets from winners to laggards to restore desired allocations. This forces investors to buy low and sell high. Rebalancing also enhances risk control. The optimal rebalancing frequency depends on costs, market conditions, etc. Typically, rebalancing every 6 or 12 months is reasonable.
In summary, crossover strategies like allocating across stocks, bonds and alternatives can help investors achieve attractive risk-adjusted returns. However, maintaining correlations, costs and weightings takes expertise. For most individuals, funds like target date and balanced funds provide an accessible option. But some oversight of asset allocation is still required for success.