They can regard investing as a game of musical chairs with these "fast money" traders, and either choose to dance or sit out at any given time.

They can participate by hiring their own short-term speculators (who ostensibly have the talent to compete) to handle some portion of their investment portfolios.

Or they can decide the game being played is the wrong one altogether and decouple themselves from the market's traditional benchmarks, focusing instead on risk-adjusted returns.

The first option is attractive in its simplicity but fraught with timing risk. If investors sit out market periods entirely, they risk significant underperformance if their timing is wrong, which means they may miss their investment goals or have to scale them back. If they choose, instead, to be "fully invested" at all times and play the volatile trading game, they might see more dangerous outcomes and be left standing with nowhere to sit when the music stops. (Think of the stock market from 2000 to now.)

The second option, hiring one's own managers specializing in shorter-term trading strategies (a la hedge funds) can also be attractive. Access to hedge funds (or hedge fund surrogates) has increased exponentially in recent years. People who could never have invested in these strategies before now have the opportunity. The downside is that the managers with the best track records tend to have very high minimums (and fees to match), plus onerous liquidity lockups, which realistically makes them accessible only to the super rich anyway.
The alternative is funds of funds, which allow investors to pool money to reduce investment minimums. But unfortunately, funds of funds give investors another layer of fees. Meanwhile, clients still face somewhat high investment minimums, and they haven't eliminated the burdensome liquidity lockups.

The newest option in this space is registered public products (1940 Act mutual funds and registered structured products). The advantage of these is that they are more accessible to smaller investors. The fees tend to be much lower and the liquidity significantly better than they are in the private space. The downside is that the return potential of these products can be less than that of their private peers.

The third option is to focus on risk-adjusted returns, which means identifying the most attractive returns on an investment per unit of risk. It's challenging for those not versed in this type of analysis, but it's possible to measure risk-adjusted performance using tools such as the Sharpe ratio, the Treynor ratio, Jensen's alpha and the Sortino ratio.

Most investors are not familiar with these and may have a tough time unlearning the "What's the Dow doing?" mentality they've developed throughout their investing lives. They may not take much solace in knowing that their investment portfolios have much better Sharpe ratios than the Dow Jones Industrials Index during a bull market (even during a short-term cyclical spike or a bear market rally). This type of investing takes a steel will and fierce discipline.

Taking into account these risk-adjusted returns means looking forward rather than back, making forward-looking assumptions about asset classes rather than relying on past performance. The obvious question is, "What if my forward assumptions are wrong?"
But the choice doesn't have to be either sitting it out or dancing to the music. Rather than taking any one of these approaches, I believe in pursuing all three. Investors can apply some of their portfolio (perhaps 30% to 50%) to a "core" holding diversified for their long-term goals-a core whose goals could allow the investor to emulate the endowment model. These assets may be subject to swift market movements, but an investor will not be worried here about market swings, interest rates or inflation.

The investor could then allocate the next portion of his or her assets to investments with a shorter time horizon (an allocation that can range from 20% to 40%, depending on the person's circumstances and appetite for risk). This part of the portfolio could be allocated to "absolute return" managers, and investment vehicles such as hedge funds, funds of hedge funds, structured products or mutual funds, according to the investor's unique parameters. The rest of the portfolio (up to 40%) could then go toward tactical investments according to the investor's risk-adjusted return potential (not high beta speculation).