The saying “There’s never been a better time than now” rings truer than ever, especially in today’s economy.
John Archibald, a client portfolio manager at Aptus Capital Advisors, an Alabama-based RIA with $7 billion in assets under management, explains how evolving market dynamics are changing the value and application of traditional portfolio strategies. Emphasize what you are rebuilding.
First, he believes the classic 60/40 stock/bond portfolio remains popular among investors, despite periodic questions about its longevity.
“A lot of the debate has really subsided in recent years, as we saw in 2023 and 2024, when people are actually doing what they were doing before 2022, which is traditional stocks (and) bonds. And of course people have been rewarded for that.
But he suggested that advisors and investors need to think differently, citing the firm’s approach of incorporating options, particularly put options, to capture market growth while mitigating volatility.
Mr. Archibald emphasized that put options allow clients to participate more strongly in favorable market conditions without relying entirely on bonds that have underperformed as interest rate movements deviate from expectations. are.
After all, in the current economic climate, managing risk is more important than predicting market movements.
He compares put options to brakes and seatbelts in a car, using an analogy to Formula One racing. These allow investors to navigate the market more confidently and faster, even in volatile conditions. By allowing exposure to stocks while providing downside protection, puts act as a buffer against unexpected market shocks.
“Puts are there to protect you when the market falls quickly,” he said. The value of put options lies in their ability to appreciate when market volatility spikes, making them a valuable asset during recessions.
“How we construct our portfolio is more stocks and less bonds, but because we own hedges we can remain risk-neutral. You can drive faster and manage risk,” he says. “That’s really the crux of this whole thing.”
Additionally, unlike bonds, which can lose value in high stress environments as investors seek cash rather than securities, put options offer liquidity and an inverse correlation with stocks. Archibald noted that this approach makes it easier to reinvest in stocks at lower prices, potentially improving long-term returns.
“Holding more stocks and incorporating puts would be a way to attack this environment, because in an inflationary regime, you need stocks to achieve above-inflation growth.” he added.
He highlights three potential scenarios that could play out over the next few years, all of which support increasing allocations to equities.
Growth cycles: If the economy experiences sustained growth like it did in the late 1990s, portfolios with excessive bond exposure could be delayed, he suggests. In this scenario, stocks outperform bonds, giving you higher beta exposure. “If we are in a 1995-style growth cycle, excessive bond exposure could be dismissed,” Archibald warned. Inflation: High inflation typically reduces the performance of bonds as interest rates rise. To combat this, Archibald recommends maintaining higher equity exposure to take advantage of growth, with put options to protect against unexpected setbacks. “Stock prices may rise, but if inflation spikes and then returns, bonds are useless,” he warns. Recession: If a recession occurs, Archibald believes that put options provide superior downside protection compared to bonds. Bonds may not provide the hedge you expect, especially during liquidity crises, as seen during periods of extreme market stress such as the 2020 COVID-19 crash. . Conversely, put options retain liquidity and can be quickly monetized to cushion rapid drawdowns.
Ultimately, Archbold emphasizes the importance of balancing growth and protection.
“We’re not in the forecasting business. We’re in the risk management business. Puts are the brakes that keep the straight alive.”
Name: John Archibald
Job Title: Client Portfolio Manager
Company name: Aptas Capital Advisors
Established: 2013
Assets under management: $7 billion
