JD Gardner, Founder and CIO of Aptus Capital Advisors, joined Keith Black, Managing Director of RIA Channel, to discuss using options to transform asset allocation.
Aptus has two business units, including Aptus Investment Management and Aptus Capital Advisors which provides services to investment advisors.
Proper asset allocation is the key to investment success, driving over 90% of portfolio returns. Introducing options into a portfolio can reduce downside risk, enabling a higher allocation to equity markets. US monetary and fiscal policy has created substantial inflation, which Gardner notes should encourage investors to have return targets above the annual US budget deficit. Without a return of 6% to 8%, investors risk losing purchasing power relative to long-term inflation. Investors may be tempted by 5% returns on Treasury bills, but those returns are likely to be disappointing relative to the long-term returns of risk assets.
Over the last 30 to 40 years, investments in US fixed-income markets have provided positive returns at a low correlation to equity markets. However, this return profile might not continue in the future. Fixed income should be viewed as a diversifier, but it creates basis risk in a portfolio.
Aptus views risk differently, rating the long-term loss of purchasing power as a greater risk than portfolio drawdowns. Investors should have goals to maximize the long-term compounded returns of their portfolio rather than focusing on short-term drawdowns. Portfolios implementing options-based strategies may be able to contribute to those portfolio goals.
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A basis point (BPS)is used to indicate changes in interest rates of a financial instrument. Basis points are typically expressed with the abbreviations “bp,” “bps,” or “bips.” One basis point is equal to 1/100th of 1%, or 0.01%. In decimal form, one basis point appears as 0.0001 (0.01/100). Standard deviation is a statistical measurement of the dispersion of a dataset relative to its mean. If data points are further from the mean, there is a higher deviation within the data set. It is calculated as the square root of the variance.
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