Fortunately for investors, there are other asset classes that tend to either hold steady in a downturn or rise when markets suffer. While history can't predict what will happen in the future, several assets have historically performed well in times of crisis — and appear to be leading the pack again.
Government bonds
Fixed income has gotten a bad rap over the last few years, because it barely pays a yield in today's low-interest-rate environment. But when it comes to balancing a down market, this asset has consistently outperformed equities. According to MFS Investments, global bonds returned 12 percent in 2008. Bonds also did well during the tech crisis, posting above 8 percent returns in 2000, 2001 and 2002.
The reason why bonds do well in bad times is that they've always been considered a risk-off asset, said Nathan Thooft, co-head of Global Global Asset Allocation for Manulife Asset Management. U.S. treasuries, and especially long-term bonds, are thought of safe, solid investments. America is not going bankrupt even during a recession. "These are safe-haven assets," he said. "There's little likelihood of default."
So far this year, this thesis has held up. The Barclays Long Term U.S. Treasury Total Return Index is around 4.5 percent year-to-date. It's important to know, though, that not all bonds are created equal. High-yield fixed income tend to be much more correlated with equities, said Thooft, and their prices also fall when stocks go south.
Managed futures
Most retail investors don't hold hedge fund–related strategies in their portfolios, but it might be time they do. According to Reliance Capital Markets, a Chicago-based company that sells alternative assets, managed futures returned 14.34 percent in five crisis periods between 1994 and 2008, far more than anything else. In 2008 this alternative strategy also returned around 14 percent.
So far this year, managed futures are up about 4 percent, said Michael Greenberg, a portfolio manager with Franklin Templeton Solutions. The reason why this investment does so well is that it tracks trends, both on the upside and on the downside. For instance, if the S&P 500 breaks below, say, its 150-day moving average, then that could be a sell signal, and a manager might start putting shorts on stocks. If it sees a positive trend, it might go long on certain sectors.
Managed futures don't do well during periods of volatility, when there's no real trend to follow, said Greenberg. But when the market dives for an extended period of time, it's often the best-performing asset class of the bunch.
Gold
Generally, gold is looked at in the same way as bonds — as a safe-haven asset where one's money can be protected. That's because gold is a physical asset that can be bought and sold around the world. In 2008, from early November to March 6, when the market bottomed, the S&P 500 dropped by about 30 percent. Gold was up by almost the same amount.
So far this year, the yellow metal's price is up 4.34 percent. "People want to hold a physical commodity that has inherent value and can hold that value when equities decline," said Ed Egilinsky, head of alternative assets at Direxion Investments, a New York-based ETF and mutual fund company.
Gold can be a tricky asset class, though, as its price is often determined by sentiment — how people feel about the markets — than actual fundamentals. Once markets stabilize, it's difficult to know how gold will perform. "It's hard to value gold, because a lot of things drive the price, like inflation levels, the risk-off environment and supply and demand," said Thooft.
Cash
Money — actual physical dollars — is considered an asset class and one that barely budges during a crisis. A dollar is a dollar in good times and bad. What that means is that it always outperforms equities in a down market — if stocks fall by 10 percent, cash falls by nothing. Of course, if one's holding too much cash during a bull market, they're not making anything, either.
Greenberg suggests that people who are nervous about the markets hold a little more money in cash. You won't get any upside that other uncorrelated assets may provide, but your portfolio will fall by less than if it was all in equities. It's also easier to redeploy cash into stocks when markets calm down.
He's not suggesting people time the market and sell out of their positions, but holding a little more cash in general these days, after a seven-year bull run, isn't a bad idea.
Equities
In tough times, stocks fall together. In 2008, every equity category fell by more than 26 percent. However, in market corrections some sectors do fall less than others, and losing less money on the downside is as important, if not more, than making money on the upside.
Typically, defensive sectors, such as health care, consumer staples, telecoms, REITs and utilities, hold up better than cyclical ones, said Thooft. And that's what we're seeing today, too. Utilities have fallen by between 0.1 percent and 0.4 percent, depending on the sub-sector. Tobacco, considered a staple — smokers need to smoke — is the best-performing non-utilities sector. It's down by only 1.97 percent, according to S&P Capital IQ.
Historically, large caps do better than small caps, as the latter is considered high risk, while growth is usually hit harder than value for the same reason, said Thooft. When it comes to international vs. U.S. stocks, American equities outperform when the correction or crisis is due to more global factors, as it is today, and underperforms when the issues are more U.S.-specific, such as in 2008.
Stay diversified
What all of this means is that an investor has to diversify and own a portfolio that includes more than just stocks and bonds, said Egilinsky. He thinks clients should have between 10 percent and 30 percent of their portfolio in alternative assets, such as commodities, managed futures, long-short strategies and other investments.
Thooft agrees. He said investors should hold between 10 percent and 20 percent of their assets in alternatives. Whatever an investor feels comfortable owning, the idea is not to hold all of their money in stocks. In this environment, where volatility is increasing and uncertainty prevails, it's important to own assets that can hold up in bad times. - By Bryan Borzykowski, special to CNBC.com
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