For example, from 2000 through 2016, by getting half the upside and half of the downside of the S&P 500, a $1,000 investment grew to about $1,800 versus $1,500 for a buy-and-hold approach.
Advisors should use broadly diversified portfolios to reduce volatility, and include asset classes and strategies that they might have overlooked in the past, Easterling tells Financial Advisor.
“Advisors’ instincts are to compare returns” among investments, he said, and when they assume U.S. stocks will return 10 percent, everything else looks bad.
“The reality is, you should run your Monte Carlo simulator using relevant return assumptions, as [Harry] Markowitz [the founder of MPT] told us to do,” he said. “With stocks, if your best case is 5 or 6 percent, all of a sudden there are a lot of investments that look pretty attractive” as diversifiers.
Examples include REITs tied to real property, certain MLPs and inflation-linked bonds, he said. These assets can respond to inflationary scenarios, which would drive down valuations.
Easterling adds that it has been tough for bears like him to be taken seriously as the market moves higher. He includes in that bearish camp Research Affiliates founder Rob Arnott; John Hussman, the founder of the Hussman Funds; and Jeremy Grantham, co-founder of GMO.
“If we maintain the integrity of our message and call them as we see them, the result is so negative it almost doesn’t seem credible,” Easterling said.
But the current U.S. valuation level is dangerous. “We’re in the top 10 percent—well into top 10 percent—of all [valuation] periods in history,” he said.