Franklin Templeton’s take
This past summer, in a blog post on my site FindependenceHub.com, Franklin Templeton observed that “in many countries, both equities and fixed income have declined, which has led to the second-worst performance for balanced portfolios in 30 years. Typically, bonds outperform stocks in down markets, but not this time. In fact, this has been the worst start to the year for fixed income in the past 40 years, thanks to higher inflation and the resultant rise in interest rates.” As of mid-October, the year-to-date return for the S&P/TSX Composite Index was about minus 10%, while the FTSE Canada Universe Bond Index had returned about minus 15%.
The same Franklin Templeton post covers the growing risk of a recession and shares that the firm was “reducing risk” on portfolios and cutting equity exposure slightly below normal weight. It’s reducing the Europe weighting because of the war in Ukraine. It is “slightly overweight the U.S. but acknowledges that valuations are subject to disappointment with declining earnings growth. We are overweight Canada, which continues to benefit from rising resource prices.”
It’s trickier with fixed income, the company said, “as the skewed return relationship for bonds could become even more acute… If bond yields increase (and prices drop), the loss for holding that bond is negligible compared to the gain if interest rates decline even slightly from current levels. With that in mind, we are adding to bonds at the margin in the event there has been an overshoot in interest rates but are also holding more cash than usual to dampen volatility.”
Vanguard changes the guard
In July, indexing giant Vanguard released a paper, reassuringly entitled “Like the phoenix, the 60/40 portfolio will rise again.” “We’ve been here before,” the paper asserts. “Based on history, balanced portfolios are apt to prove the naysayers wrong, again.” It goes on to say that “brief, simultaneous declines in stocks and bonds are not unusual… Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time. That’s a month of joint declines every seven months or so, on average. Extend the time horizon, however, and joint declines have struck less frequently. Over the last 46 years, investors never encountered a three-year span of losses in both asset classes.”
Vanguard also urged investors to remember that the goal of the 60/40 portfolio is to achieve long-term returns at roughly 7%. “This is meant to be achieved over time and on average, not each and every year. The annualized return of 60% U.S. stock and 40% U.S. bond portfolio from January 1, 1926, through December 31, 2021, was 8.8%. Going forward, the Vanguard Capital Markets Model (VCMM) projects the long-term average return to be around 7% for the 60/40 portfolio.”
It also points out that similar principles apply to balanced funds with different mixes of stocks and bonds. Its own VRIF, for example, is a 50/50 mix and its asset allocation ETFs vary from 100% stocks to just 20%, with the rest in bonds.
What does this mean for you?
So, how has this phenomenon of the two dominant asset classes both sustaining losses affected financial advisors and their clients? During bull markets, do-it-yourself investors benefit from the usual upwards trajectories of balanced portfolios and also from lower fees. But in treacherous markets like 2022’s, it can be a comfort to have support from a professional financial advisor.
Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial, says client reactions have “typically been quite good, as their portfolios this year are holding their value much better than the broad-based markets.”
