28 Oct Keep your eyes on the prize
Image by Arek Socha from Pixabay
At times like this, investors risk being unsettled by the endless rounds of media speculation and hyperbole. Talk of market failure risk by the Bank of England, squabbling politicians and headline grabbing market traders and analysts can lead investors to think that all is doom and gloom. A few months ago, the news was all about some of the dramatic falls in value of US tech stocks like Meta. Today it seems to all be about inflation and bond yield rises. If you are having to refinance a large mortgage at 6% instead of 2%, that might well hurt. But if you are an asset owner, being able to generate a yield of 4% on your short-term bonds going forward, it is much better than the miserly near-zero yields of a year or so ago. It is easy to get sucked into the maelstrom and miss the wood for the trees.
So let’s head back to calmer waters and take a look at the ‘boring’ 60/40, equity/bond portfolio that provides a sensible balance between the upside, real (after inflation) return expectations from equities and the downside balancing exposure to higher-quality, shorter-dated bonds for longer-term investors. Notwithstanding claims from some quarters (usually companies with a shiny new product to push, which rather undermines their credibility as impartial commentators), the numbers below illustrate clearly that it has done a pretty good job since 1989 of helping investors grow the purchasing power of their assets. Cash is provided for comparison.
Figure 1: The ‘boring’ 60/40 portfolio – January 1956 to September 2022
Source: Bloomsbury simulated model portfolio. Data from DFA ReturnsWeb program.
In the past ten years, up to the end of September 2022, investors would have achieved a more than a 38% rise in their purchasing power. In 2022 such a strategy is down -10% before inflation and -16.6% after inflation. Although this is disappointing, it sits well within the bounds of expectation for a portfolio like this, as the table below shows.
Table 1: Top ten falls and recoveries since January 1956 – after inflation
Source: Bloomsbury simulated model portfolio. Data from DFA ReturnsWeb program
Ten tips for avoiding the maelstrom
At times like these there are a number of things that investors can do to feel calmer and more in control:
- Read, watch or listen to less financial press and commentary.
- Accept that investing is always a two steps forwards, one step back journey.
- Try not to dissect your portfolio statement line by line – look at the big picture.
- Look at portfolio outcomes over the longest time frame you have available.
- Remember that a fall in value is not a loss unless you sell.
- Higher bond yields and lower equity prices point towards higher expected returns.
- Attempting to jump in and out of markets is simply guesswork, and likely to be costly.
- Place 2022 in the context of your multi-year, or even multi-decade, investment horizon.
- Keep your eyes on the prize of building future purchasing power over the longer term.
- Keep the faith – stay invested.
This note is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person. Your capital is at risk when investing. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance.
 The appropriate balance between bonds and equities for an investor can only be arrived at through a deep discussion between client and adviser. This analysis has been provided for educational purposes only.
 Diversified portfolio of global developed market and emerging market equities tilted to value and smaller companies with a small allocation to global commercial property, balanced with short-dated high quality bonds and a small allocation to index linked gilts. Index data to 02/2004 (adjusted for reasonable costs) and live fund data thereafter. Adjusted for custody and management costs. Full details available on request. Inflation – UK RPI to 04/2010 and CPI thereafter. Cash – UK 1month T-bills.