FOMO: How to Manage Expectations when it comes to Alternative Investments

Risk management rarely feels urgent—until it’s too late. In rising equity markets, investors may resist the more modest returns that may accompany hedging strategies such as fixed income and alternative investments due to a fear of missing out on market gains. This is why managing client expectations is one of the most critical roles a financial advisor plays. The challenge is not just building a well-diversified portfolio—it is helping investors stick with it. This means reframing the conversation—shifting focus from short-term performance to long-term portfolio stability and resilience.

One effective way to do this is by focusing on the time required to recover from market drawdowns. As the chart below shows, many investors understand losses in percentage terms, but few appreciate how long it can take to fully recover—not just to recoup paper losses, but to reclaim the compound growth they have missed out on during that period.

Maximum Drawdowns and Recovery of Various Investments

February 1986 – June 2025 (assuming a 5% average annual return)

Source: LoCorr Fund Management. Bonds, Bloomberg U.S. Long-Term Treasury Index, Real Estate, S&P/Case-Shiller U.S. National Home Price Index; Stocks, S&P 500 Index; Commodities, S&P GSCI Index.

This math becomes even more sobering for investors approaching retirement. For example, a 45% loss (which the Bloomberg U.S. Long-Term Treasury Bond Index recently experienced) at age 64 would require an unrealistic 82% return to fully recover. In such cases, the emotional and financial toll of waiting several more years to retire, or accepting a permanently reduced lifestyle, is profound.

When markets decline, for each percentage point lost, an even greater return is required to get back to breakeven. For this reason, allocating to investments that behave differently than traditional markets, such as alternative investments, may contribute to stronger long-term returns and improved portfolio durability.

The Deeper the Drawdown, The Harder it is to Bounce Back

Equity markets have historically demonstrated a strong ability to recover from downturns, a trend that has accelerated following the Global Financial Crisis (GFC) and COVID. While past recoveries, such as the -44% decline during the Dot Com Bust in the early 2000s, often took years to recover from, more recent market rebounds have been noticeably faster. Despite markets having a strong long-term track record of recovery, the speed of that recovery is not always guaranteed to be quick. What if the next drawdown is different? If equity market corrections were to take years to recover and another lost decade ensues, how would that impact investor portfolios, especially for those nearing retirement? The uncertainty about how quickly the markets will bounce back post-drawdowns is a reminder of the importance of diversification and ensuring your allocations move differently at different times.

Alternative Investments Can Offer Both Risk Management and Growth

Sophisticated institutions such as sovereign wealth funds, endowments, foundations and family offices began adopting alternative investments decades ago. The goal? To achieve long-term capital appreciation, diversify across uncorrelated strategies, and dampen volatility. In short, to fulfill their mandates without relying solely on traditional investments. These institutions face the same challenges as individual investors do—seeking diversifiers that have the potential to improve long-term portfolio performance while reducing risk.

Over the last few decades, the range of alternative investments available to individual investors has expanded, providing them with similar access to that of institutions. The asset class’s growing popularity stems from its ability to simultaneously address two key elements in portfolio construction: performance and risk management.

While the search for higher returns often dominates investor conversations, the ability to withstand volatility is what defines true financial resilience. In a world where market cycles are becoming shorter and shocks are occurring more frequently, building portfolios that can bend but not break becomes a central imperative. Managing risk, however, requires more than just access to markets—it demands discipline, a deeper understanding of portfolio construction, and often professional guidance.