What’s Ahead

• Macro trends have grown volatile in recent months, with new risks emerging. 
• Investors may feel compelled to make portfolio changes, but that can be dangerous to their outcomes.
• Structured Notes offer a potential solution to market volatility and the risks of making allocation shifts based on emotion. 

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The macro environment is uncertain right now. The stock market remains near record highs with premium valuations, the direction of interest rates is not certain as inflation fears percolate, and geopolitical tensions rise and fall with each passing news update. 

Many investors consider asset allocation the only “free lunch” in investing. And in a perfect world, that may be true. In reality, emotions drive investor behavior, and not taking that into account is a mistake. We believe that the years ahead could feature large so-called “behavior gaps” among retail investors. 

Mind the Gap: The Cost of Selling During Market Declines and Volatility Spikes 

To get to the point, data shows that the biggest mistake an investor can make is selling at market lows. DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) consistently finds that retail investors lose ground to the S&P 500 (SPX) due to failed attempts to time the market.

According to DALBAR, the average stock investor earned 5.5 percentage points less than the SPX in 2023—the third-largest behavior gap in the last 10 years. The research group noted that the average long-term annual performance discrepancy is closer to three percentage points, but even a gap of that size can result in huge underperformance over decades.

More importantly, trying to time the market can lead to investors missing their financial goals. Research shows the risks of not sticking to an asset allocation. However, signs show that investors are starting to improve their behavior. The Vanguard Group notes that there has been an improvement in the behavior gap (which has averaged 1.55% annually according to their work) in recent years. Still, even a small gap can lead to adverse financial outcomes. 

Furthermore, J.P. Morgan Asset Management routinely calls out the negative impact of being out of the market during the 10 best days of the year, which can happen when attempting to time the market. Compared to being fully invested, giving up those 10 best days (many of which occur during high-volatility periods) results in a 4.2 percentage point gap, on average.

Missing the 10 Best Days: A 4.2% Return Disparity

Source: J.P. Morgan Asset Management

Closing the Gap With Structured Notes 

Primed with the evidence of how dangerous trying to time the market is, incorporating portfolio stabilizers that can offer safety when bear markets occur makes sense. Structured Notes are designed to provide both downside protection and enhanced returns, but perhaps more importantly, they can help investors stick with a long-term strategy no matter the macro noise and market volatility. Here are some of the primary benefits: 

1. Potentially Smoother Ride 

Structured Notes can include features like principal protection, allowing Noteholders to remain invested with reduced risk, based on the individual Note’s terms. Certain market-linked Notes typically include a buffer against the underlying asset’s losses, making equity corrections less painful. 

2. An Enhanced Return Profile 

It’s not all about reducing downside risks. Certain Structured Note types include moderate leverage that amplifies potential returns over the stated outcome period. We like to describe Notes as being the Swiss Army Knife of an investor’s toolkit, and the amount of leverage depends on the composition of the long bond and options package that make up the Note. More aggressive investors may find Growth Notes more appealing while retirees might find Income Notes issued through Halo desirable.  

3. More Attractive Yields, Potentially

Structured Notes can potentially offer higher yields compared to traditional bonds by incorporating features like contingent coupons on equity performance. Even with higher interest rates today, such Notes can augment a diversified stock/bond portfolio.

The Bottom Line 

Traditional asset allocation has worked well for many investors. However, empirical evidence has shown that uncertain macro developments and market volatility can lead investors to make adverse shifts at the wrong time, thereby hurting long-term portfolio performance. Fear and greed too often drive the narrative, which is often dangerous for outcomes.  

Structured Notes offer a solution by combining protection, enhanced-return potential, potentially higher yields, and personalization into an investment vehicle for investors across the risk spectrum. This makes for an effective tool to help people confidently reach their financial goals.

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About the author

Alex Rabinovich, CFA

Halo Investing

Alex Rabinovich, CFA is the Global Head of Sales at Chicago-based Halo Investing. In this role he is responsible for leading teams, strategy and execution focused on sales, partnership and service efforts for Halo’s enterprise and advisor clients, which include banks, broker dealers and independent advisory firms. Alex has been with Halo since early 2023 and has spent 25+ years in the industry helping, advisors, intermediaries and institutions implement  and grow investment strategies.

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 Please see our Halo Disclosure Page for important disclosures.

An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Content and any tools discussed are provided for educational and information purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular product or service.