4 Portfolio Strategies for When ‘Nirvana Period of Free Lunch’ Ends

"And when you have a tightening bias, it means you could have capital loss in those bonds. So what other ways can you manage risk?" she said.

This is where alternative investments come into play.

"Another way that the industry and portfolio constructors and asset allocators have tried to manage risk is by using alternative investments," Shalett said. Adding, "We are emphasizing using various alternative strategies to help us manage risk and portfolios. Those alternative strategies include hedged strategies – so, equity long-short type strategies, global macro-type strategies, credit long-short type strategies and event-driven strategies."

This may take some convincing, as the low volatility has cause a lot of alts to disappoint investors.

"[Alts] need volatility to demonstrate their value proposition," Shalett said. "That value proposition is very much in question right now. One of the challenges we have is convincing our clients that just at the moment when it looks like this particular asset class may have lost efficacy is exactly the time you need it because it will have efficacy."

3. Don't give up on active management

"Another anomaly of this cycle, over the past six and a half years, has been the dominance and outperformance of passive strategies," Shalett said. "Why? Because quantitative easing took the rising tide and lifted all the boats. The vast majority of the expansion this cycle was all about beta, was all about inflating assets. There wasn't a lot of dispersion in markets."

Shalett is urging clients not to give up on active management.

"This is the exact point where people have almost given up on active, that it's highly likely that active management is going to work and add value," she said. "And, in fact, in August – this latest sell-off – was the first time in a really long time that we saw active managers outperform in a big way. We want a lot of our advice to rebalance this bias our clients have taken towards passive and come back to active because we think that active management can also outperform."

4. Focus on finding secular growth

"In this world of lower for longer, lower growth, lower rates, you really have to focus on finding secular growth," Shalett said.

According to Shalett, stocks that are showing secular growth include the "biotech stocks, the social media stocks, a smaller and smaller group of stocks."

"From our perspective, that group of secular growth stocks, while they are expensive, may in fact still have 'room to run,'" she said. "So despite their valuations, we're continuing to tell our clients to have some exposure to those stocks because in a growth-starved world we think they are going to continue to be big. But you probably want to barbell those with some of the stocks that have gotten punished in this overall sell-off."

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