Are Balanced Portfolios dead?
Legend has it that in 1895 whilst in London, Mark Twain, who had been feeling a little poorly, on discovering that a journalist had written his obituary, quipped the following:
‘The reports of my death are greatly exaggerated’.
In the past few years, obituaries for a traditional ‘balanced’ portfolio of, say, 60% equity, 40% bonds have been written by quite a number of financial journalists and fund managers.
At Wells Gibson, we believe such a portfolio continues to be alive and kicking.
Good investing is grounded in three things:
1. Using investment logic to think clearly about what one puts into a portfolio;
2. Using empirical insights to inform us of the general longer-term characteristics of assets and how they work together in a portfolio, and the shorter-term exceptions to these generalities; and
3. The fortitude to stick with a sensible portfolio strategy through these shorter-term, trying periods.
A portfolio mix of bonds and equities balances the potentially severe downside falls in equity markets by owning far less volatile, good quality bonds that will not fall as far, if they do fall at all.
There is a general expectation that at times of severe equity market trauma, fearful money will move into high quality bonds pushing yields down and bond prices up - in other words, there is a see-saw effect between yields and prices - that is often but not always the case, as 2022 and 1994 demonstrated.
It is certainly fair to say that the past five-year period has been tough for 60/40 balanced portfolios, given that it included the global pandemic, the war in Ukraine, a rapid end to the era of low nominal and negative real interest rates, the highest inflation in 40 years in the UK, and a downturn in global equity markets in 2022.
Even so, it delivered a return that more-or-less matched inflation over this period, which should be regarded as a good outcome.
Furthermore, if we look at annualised, rolling real returns (after inflation) since 1970, for different investment horizons, we learn that the 60/40 structure has delivered growth of purchasing power in the vast majority of five-year horizons (and beyond). The longer one holds, the more consistent returns become.
The reports of the death of balanced portfolios are greatly exaggerated. Balanced portfolios are not dead and at Wells Gibson, we are sure Mark Twain would agree.
Note that this is not to suggest that a balanced portfolio is suitable for any specific investor. The decision as to what is suitable will be the result of an informed discussion between an investor and their adviser. This is not a recommendation.
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