Easy money is dead. Inflation is stubborn, rate cuts are scarce, and old investing strategies don’t work. Risk management isn’t optional, it’s the only way forward.
Recent market volatility underscores the need for investors to prioritize risk management and focus on long-term results over speculative gains. The S&P 500 has experienced significant fluctuations, with the Cboe Volatility Index (VIX) reaching high levels in 2024. Investors who fail to adapt risk being caught in a downturn with no safety net.
Traditional strategies that relied on aggressive monetary policy now look increasingly fragile. Instead of waiting for relief that may never come, investors need to prioritize risk management, stability, and diversification.
Omar Aguilar, president, CEO, and CIO of Schwab Asset Management, oversees investment strategies that shape the financial decisions of millions. And right now, he has a warning for investors: the easy-money era isn’t coming back. Investors hoping for a swift return to low rates are in for a reality check.
“It is indeed an interesting period of time because we have gone from the expectation that we were going to have a more aggressive rate reduction [to] now only have the expectation of having one or two rate cuts,” Aguilar says.
The shift in expectations is being driven by stubborn inflation, particularly in services and goods. Key indicators—PCE, CPI, and PPI—remain above the Fed's 2% target.
"The expectation for a more aggressive Fed policy is now likely a low probability," Aguilar explains.
Simply put, investors waiting for monetary policy or the so-called “Fed put” to change, need to rethink their approach. The short end of the yield curve is likely to stay high for the foreseeable future, especially if the effect of global trade wars pushes inflation even higher.
What could change that? A significant economic downturn or a recession.
"The only reason why that may change is if there is a significant deterioration of economic growth," Aguilar says. “Hard data suggest that the economy and US consumers remain resilient and less sensitive to interest rates. The US economy has been enjoying healthy growth supported by solid consumer spending and a robust labor market, but concerns are rising as sentiment continues to deteriorate due to higher uncertainty on economic outlook.”
While the economy is still expanding, the risk of a slowdown remains real. Any major shift could force the Fed's hand, but until then, volatility will dominate fixed-income markets, particularly in the mid-range of the yield curve.
"I will also add that advisors and investors need to manage risk coming from more volatility of bond yields on the middle to long part of the yield curve. This is primarily due to term premium dynamics, changes in inflation expectations and economic growth," he notes.
That volatility is exactly why Schwab is prioritizing risk reduction.
"Risk is likely to continue to increase in both equities and fixed income, and therefore we have adjusted our asset allocation to reduce and rebalance risk across equities and fixed income," Aguilar says.
As a result, Investors should focus on risk management instead of chasing speculative gains. In a high-rate world, uncertainty is the only guarantee.
Some argue the traditional 60/40 portfolio no longer works, but Aguilar isn’t convinced.
"The answer is no; I did write an article two and a half years ago when we discussed what was the specific environment in 2022 that made the headline that the 60/40 was dead, and that was a very unique year where both equities and fixed income underperformed,” he says.
He sees that scenario as an outlier, noting that historical asset relationships have since normalized.
"Since then, things have started to become more normal, and the correlation structure between asset classes has been back to normal," he explains.
Fixed income has regained its role as a counterbalance to equities, and cash is now a viable portfolio component.
"In periods of time, like we have seen at the beginning of this year, having exposure to fixed income and cash is beneficial," Aguilar says. "In periods of time, like last year, when we saw risky assets doing very well, having exposure to equities and areas that protect for inflation is good."
The takeaway? Diversification still works.
While the 60/40 framework remains relevant, private markets are reshaping investment strategies.
"The access to private capital has changed the game, and that has been a trend that we continue to follow," Aguilar says.
Private equity, private credit, and private real estate are playing a bigger role in portfolios.
"Having access to private assets is an area that will enhance the 60/40 structure," he says. "And when you think about the 60/40 exposure, most of the private markets will basically play a role, either on private equity and private real estate for risky assets or private credit in the more fixed income on cash-oriented markets."
The main focus for Schwab is to educate clients on the liquidity premium and liquidity risks that come with investing in private markets.
With cash yields staying high, short-duration bonds have become an attractive safe haven. Holding cash and short-term bonds isn’t just about yield, it’s about risk management. Long-duration assets remain vulnerable to volatility, making capital preservation a smart strategy.
"The yields that we get from cash now are actually fairly attractive with the Fed being a big driver and signaling that there will be very few cuts," Aguilar says. "We continue to encourage our clients to have access to that short end of the curve, because it is attractive.”
Schwab has built its reputation on passive investing, but market turmoil is testing that approach. Aguilar emphasizes that passive investing isn’t a universal solution.
"We still advocate that certain asset classes are more efficient in terms of information flow, the most optimal allocation will be through a low-cost index or passively managed ETF,” he says.
Large-cap U.S. stocks remain efficient markets where passive strategies thrive. However, in small caps, emerging markets, and international equities, active management still holds value.
"We also believe that there are some asset classes that are not as well covered, which obviously have other sources of opportunities that represent ways to outperform," Aguilar says.
The dominance of mega-cap stocks has made things even tougher for active managers.
"A lot of the performance was driven by a few stocks, and in that environment, it's very hard for an active manager to add value, mostly because you have to underweight, or you have to go against those mega, magnificent seven," he says.
This concentration makes it difficult for active funds to justify their fees. But as market conditions shift and stock dispersion increases, stock pickers may find new opportunities.
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