Tenet 1: Take advantage of true diversification¹

Expand upon the traditional asset allocation menu and consider asset classes both positively and negatively correlated to the market, such as commodities, futures, real estate, inverse investments, hedge funds and leveraged or currency products—all of which may help investors achieve a truly diversified portfolio that reduces risk.

Tenet 2: Combine leverage with diversification to achieve a targeted risk/return objective

Use leverage to increase exposure to select market indices, freeing up assets to invest in alternative asset classes.

Tenet 3: Offset the constraints of long-only portfolios

Long-only portfolios increase in value only in a rising environment. By adding short or inverse financial products to a portfolio—inverse funds, options or futures—investors can potentially reduce market risks.

Tenet 4: Move away from cap weighting

Cap-weighted strategies are equivalent to a buy-and-hold strategy in which the largest companies play a major role in performance. By moving to an equal-weight-based strategy in which an investment is equally divided among the stocks in its respective index and continually rebalanced to maintain its equal weight, investors enjoy a broad, dynamic exposure to the index.

Tenet 5: Incorporate current and forward-looking data

Instead of considering recent historical data and past performance to make projections for future periods, investors may want to consider current information to project future expectations and to optimize returns.

Tenet 6: Implement multifactor strategies

When estimating an asset’s expected return, investors may want to take into consideration a variety of factors, such as growth, value, size and momentum.

Tenet 7: Employ rules-based rebalancing

Rules- or risk-based rebalancing—putting parameters in place based on portfolio weightings—rather than a preset, calendar-based schedule to rebalance may help investors avoid the risk of overconcentration of an asset class in a volatile market.