Wed. Oct 27th, 2021


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A significant relationship between equities and government bonds broke during September, causing the largest losses for diversified investment portfolios since last year’s pandemic market route.

Signs that inflationary pressures could be hedged more have put consumer and business sentiment under pressure. This helped cause the first monthly loss in the S&P 500 since January. Treasury bond yields have risen as investors expect the US Federal Reserve to tame rising inflationary pressures next year.

Losses in the two major asset classes have a typical consequence 60/40 portfolio with U.S. equities and government bonds falling 3.5 percent in September. According to the FT calculations, the 60/40 mix has not suffered such a large loss since a 5 percent decline in March 2020.

The combination of falling stock and bond prices during September “is a problem for all investors and not just asset managers,” Seth Bernstein, president and CEO of AllianceBernstein, told the Financial Times.

Over the past four decades, a 60/40 portfolio has offered investors solid returns and lower volatility. The strategy is a mainstay of retirement portfolios and older savers often shift the balance in favor of bonds for their fixed income.

The appeal of a 60/40 strategy lies in the fact that a majority stake in equities provides exposure to growth as companies increase their earnings. A smaller portion of high-quality bonds serve as a stabilizer in a portfolio, and this typically increases in value during times of stock market stress.

Bar chart of the US portfolio 60/40,% return from previous month, showing investors suffering as both equities and bonds fall in value

During the decade from 2010, the 60/40 portfolio delivered an annual return of 10.2 percent and investors a profit of 15.3 percent last year.

A period of prices for treasury bonds and shares that coincide ultimately depends on whether the current inflationary pressure is a transient or ongoing phenomenon, ‘says BCA Research.

Bernstein warned that investors need to prepare for greater volatility in the market and experience much lower returns in the current decade due to owning a diversified portfolio of stocks and bonds.

“The 10-year return can easily rise to 2 percent,” and “investors are entering a period of much greater volatility for bonds, given the uncertainty about inflation and the small income they now generate,” Bernstein says.

While the 60/40 mix has increased 8 percent in 2021, a challenge for investors owning a combination of stocks and bonds is that both markets are very expensive, limiting the range of future gains.

“It’s mathematically impossible to repeat the record of the 60/40 portfolio over the last few decades because rates are so low now,” said David Giroux, portfolio manager at T Rowe Price.

Vanguard last week updated its forecast of expected returns of 60/40 for the coming decade and their capital market model has an average annual profit of 3.8 percent until 2031. The average annual return for the S&P 500 over the next decade is at 3.2 frame. sent.

“Our forecasts today tell us that investors should not expect the next decade to look like the previous one, and that they should strategically plan to overcome a low-yield environment,” writes Joseph Davis, chief economist at Vanguard.

This has encouraged investors to explore alternative assets such as real estate and private credit in a balanced portfolio approach.

“I have a portfolio that competes with 60/40 strategies, and it does not contain Treasuries, and we also think most stocks are not attractive,” Giroux said. The T Rows Capital Valuation Fund owns utilities that pay dividend yields of 3 percent, along with leveraged loans and bank debt that are less volatile and that match the returns of a more risky portfolio.

“In five years, I would not be surprised to see an annual return of shares of 4 percent,” says Giroux.

Bernstein said investors should own fewer bonds and own more shares in their portfolios. Although this approach means you have to tolerate more volatility in your portfolio, your exposure to bonds can protect against a large drop in equities.

“Everyone is thinking about diversifying, but it’s about owning a fixed income or having cash,” he said. ‘Alternative assets and hedge funds do not offer the scale [of diversification] to protect a portfolio for many investors. ”



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