Defined-outcome strategies, systematic approaches and liquid alternatives offer ways to smooth returns and manage risk in uncertain markets without exiting equities.
Warren Buffett once famously said, “The first rule of investing is never lose money. The second rule is never forget rule No. 1.”
These are words of wisdom from the world’s most recognized long-term investor. But in markets that are becoming increasingly complicated, it’s a little harder to put into practice, especially for investors uncomfortable with riding out wave after wave of volatility.
Today’s markets are defined by hit-or-miss inflation, fiscal strain and interest‑rate uncertainty driven by central banks moving in different directions. Add rising geopolitical tensions in an increasingly multipolar world, and the investment backdrop is anything but predictable.
And then there’s the impact of technology, especially AI, reshaping market reactions at unprecedented speeds. The recent announcement that an AI platform’s new tools may transform parts of the workforce wiped out billions in software stock market cap, with an almost 20% decline in less than two weeks. The bonds of many software companies also fell during this period.
In all, it’s a complex and volatile time to be managing portfolios.
This is where history becomes an important reminder to skittish investors. Consider the S&P 500 fell 12% over the four trading sessions after Tariff Liberation Day in April 2025, only to rise around 40% in the 10 months since then.
Still, there will be investors who simply don’t want to weather increasing volatility and may want to exit the market at the wrong time—breaking Mr. Buffett’s first rule. Fortunately, today, there are more powerful tools than ever to navigate complexity and volatility. There are more options in public markets that can help customize and diversify portfolios as the traditional 60/40 portfolio becomes less reliable.
Manage and Monetize Volatility
Defined-outcome and option-income strategies can play an important role in improving the investor experience by providing downside protection with the potential for market gains and income.
Depending on each investor’s objectives and risk tolerance, defined outcome strategies give investors choices that can balance the level of downside protection against the desire for upside participation. It’s a tradeoff: the more downside protection, the less upside exposure, and vice versa. And it’s important to note that these strategies should be held to maturity.
Option-income strategies seek to monetize volatility. They can offer equity exposure with lower volatility and consistent monthly distributions. Their income is generated via stock dividends and option premiums. These can feel steadier in choppy markets and consistently deliver income in flat markets, but investors should be aware that these strategies can lag in strong rallies because some upside is often capped.
Set Discipline on Autopilot
Systematic and quantitative strategies have evolved dramatically. Enhanced data and analytics now enable repeatable, rules‑based approaches to security selection, risk management and rebalancing, helping to reduce concentration risk and potentially improve resilience.
Multi‑factor strategies blend low‑correlated return drivers, aiming to smooth outcomes and reduce dependence on any single market force. They can also tap a broader opportunity set, potentially uncovering additional sources of uncorrelated returns and seeking to spread risk across a larger pool of assets. Dynamic factor allocation goes a step further, adjusting exposures as market conditions change. The result: potentially broader diversification and more adaptive risk management across cycles.
But not all “systematic” strategies are created equal. Investors should be skeptical of approaches that simply repackage a single style tilt. True discipline means repeatability, diversification and clarity, not clever branding.
Diversify Return Sources
Liquid alternatives can add diversification by seeking returns less correlated with traditional equity and fixed income. Many seek to mitigate losses during market drawdowns or generate positive returns regardless of market direction, potentially boosting the ability to manage risk.
The category is broad, and many strategies are sophisticated, spanning trend-following, market-neutral, macro-style strategies and other absolute-return approaches. While the asset class provides many potential benefits, there are risks to be aware of, including complexity, manager skill and performance dispersion, and liquidity mismatches. Using an alternative does not guarantee diversification if a strategy’s biggest risk is still equity beta.
Keep More of What You Earn with Customized Returns
Finally, a number of strategies are designed to help investors keep more of their gains after taxes. For instance, direct indexing and tax‑aware fixed income strategies allow portfolios to be tailored to individual tax profiles. By harvesting losses, offsetting gains and maintaining market exposure, investors can potentially improve after‑tax outcomes. These approaches can be delivered through separate accounts, model ETFs, or combined solutions designed for seamless implementation.
Build a Portfolio to Hold
Investment decisions made today will have a significant impact on an investor’s future wealth potential. With a larger, more flexible and transparent public‑markets toolkit, it’s possible to help investors make better decisions.
These strategies won’t eliminate drawdowns, but they can help smooth the ride, enforce discipline and give investors a better chance of staying on course.
No single tool fits every investor. Some cap upside. Some lag in strong markets. Some alternatives disappoint when stress hits. But they also have their potential benefits. The advantage now is choice and clarity—making it easier to manage the complexity of the market.