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Can You Manage Your Future?

Rob Russell

I don't envy you, today's retirees and soon to be retirees. I don't think there's been a more difficult and contentious time to retire within the last 100 or so years. With pensions disappearing, benefits being slashed, taxes set to skyrocket, real inflation soaring, incredibly correlated volatility in the global markets, and an obvious governmental intrusion into our daily lives, I think many have become envious of the previous generations of retirees.

I get it. I'm with you. This isn't the America I was raised in. These aren't the market returns many hoped for or were told to expect. This isn't the utopic price environment we've all been accustomed to. And this certainly isn't the growth and recovery we were promised.

In January 2009, gasoline was $1.89 per gallon, and now it's just shy of $4. Long-term unemployment has tripled over the same time period. Our national debt is approaching $16 trillion, and the Federal Reserve has manipulated interest rates at the bank to darn near 0 percent, forcing uninformed retirees and aspiring retirees to take unnecessary market risk.

So what are you going to do about it? Accept things the way they are? That's not what American's do. I believe American exceptionalism and ingenuity is still alive no matter how much we're told to be ashamed and told that we're average.

What does it look like to declare your independence from the many hurdles that face you as you enter or prepare for retirement? The first step is to identify where your plan/planner is lacking and take corrective action. This stage of life is too serious, too treacherous to not get a second opinion, especially in today's whipsaw market.

With that said, this is the Smarter Investor column, so I want to share one alternative investment idea to help you take back control of your financial future. Retail investors underutilize this asset class, but it has been an integral successful ingredient to many institutions, pensions, and endowments. The benefit of adding a dash of managed futures in your portfolio strategy is simply to help you control risk (limit losses), supercharge diversification, and enhance overall returns.

Managed futures fund managers typically employ one of two strategies to control risk: market neutrality and trend following. Both strategies utilize proprietary automated trading systems that aim to remove human emotion, such as fear/greed/bias, from trading decisions and rely on stop-loss orders to limit losses and let profits run.

Even allocating a small percentage of your plain-vanilla stock/bond portfolio to this asset class can help to save a lot of pain during volatile markets. With just a 20 percent allocation to managed futures, overall risk can be reduced by almost 82 percent.

This is because managed futures have virtually no correlation to most traditional asset classes. Furthermore, managed futures funds generally perform well during negative economic or market conditions. Compare the max drawdown of a stock-only portfolio with a more diversified portfolio containing not only stocks, but also managed futures, and the risk/reward relationship is remarkably better. The max drawdown in a stock portfolio would be -41 percent, but a portfolio that included managed futures would be limited to -7.5 percent.

As a point of reference, Black Monday in 1987 saw the largest one-day loss in history, but managed futures reported +20 percent returns. Similarly after September 11, the stock market plummeted (16.3 percent), but managed futures gained +8.3 percent in the same period. Better yet, managed futures did exceptionally well during the crash of 2008, posting positive returns.

While many advisers and investors only diversify among different stock sectors or bond maturities, managed futures funds can help provide better diversification. Broader diversification is achieved through a mixture of commodities (corn, coffee, sugar, cotton, etc.), energies (oil, ethanol, natural gas), metals (gold, silver, copper, etc.), currencies (U.S. dollar, Brazilian Real, etc.), equities (Dow, Hang Seng, etc.), and interest rates (10-year treasury notes, EuroDollar, etc.) just to name a few.

An initial investment of $10,000 in the S&P 500 in 1980 would have been worth an estimated $287,890 by 2008. While this performance is certainly impressive, the same investment in managed futures would have produced $513,467 over the same time period, almost double the S&P 500.

When selecting a retail fund, private pool, or individual futures manager, it's important to consider their past performance and fee arrangement. Total management fees in this asset class tend to be higher than in the equity or fixed-income markets. Typically, this is due to the expertise, access, and availability to some of the best managers. I imagine most investors would be willing to pay a higher fee for potentially higher returns than what can be found in stocks/bonds (so be sure to request proof of performance net of fees).

With no end in sight for the European debt drama, an utter lack of understanding in Washington for what makes America exceptional, and the reckless abandon promoted by Wall Street investment banks/brokers, you and I are in the position to do exactly what our forefathers asked us to do: accept individual responsibility for our decisions and actions. Do not delay. Rise to the occasion, declare your independence, and rescue your financial future.

Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.

Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100.

Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.

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