It’s stunning how quickly everything has changed in the past few weeks.
As the coronavirus outbreak has continued to spread, so have local mandates to stay at home, which has put a strain on all of us. One thing that fascinates me about the whole situation is that none of us—not a single person of any age—has ever experienced this before. We’re treading completely new waters together. In many areas of our lives, that means that we have no ‘tried and true’ techniques for moving forward. And yet, from an investment perspective, we most certainly have been here before. Regardless of the cause, investors have experienced similar market drawdowns time and time again, and it is in the face of such scenarios when the power of a long-term, balanced portfolio truly shines.
As Marr wrote in this recent article about the origins of our firm, from the very beginning, our clients have included many of our close friends. That makes our mission to help them retire without worrying about the state of the market very personal, and it’s why we have always focused on creating balanced portfolios that take defensive positions to protect our clients’ savings. While some investment managers choose to chase returns in an attempt to beat the market, our portfolios are carefully designed to deliver a reasonable rate of return at an acceptable level of risk. Why does this matter? Because this defensive approach enables us to preserve assets during market downturns, yet meaningfully participate in the upside when the market starts to climb once more.
Over the past year, this approach has been a hard pill to swallow for some investors as they’ve watched the popular stock indices like the DJIA and Nasdaq outperform their own balanced portfolios. More than once, we’ve answered the question, “What are we doing wrong that we’re not capturing all of these gains?” The answer is all about what we were doing right at the time, and why that strategy is paying off today.
While every client’s personal portfolio is based on their personal Investment Policy Statement (IPS), a typical balanced portfolio includes 40% growth (based on the MSCI All Cap World Index), 40% fixed-income/bonds (based on the Bloomberg Barclays US Aggregate Index), and 20% multi-strategy investments (based on the Hedge Fund Research HFRX Global Hedge Fund Index). Here’s how this mix works together to help protect downside risk over the long term:
To illustrate how this defensive approach works in the real world, here’s a quick look at how a theoretical, index-based balanced portfolio has performed in the current market—and how it has provided significant downside protection relative to a portfolio fully exposed to the volatility of the stock market:
What does that mean for you as an investor? In short, a balanced portfolio can help limit losses during a significant market drawdown like what we’ve seen in recent weeks. At the same time, it can provide much-needed funds to reallocate your assets by purchasing lower-priced equities that will fuel growth when prices begin to rise once again.
Sticking to a long-term strategy can be a challenge, no matter which way the market is trending at the moment. Yet, time and time again, we have seen first-hand that a balanced portfolio can protect against downside risk. For investors who are seeking long-term financial security, the key—always—is to balance risk and reward. Investing in a balanced portfolio can help make that goal a reality.
As of 3/23/20. The “balanced portfolio” is comprised of 40% MSCI All Cap World Index, 40% Bloomberg Barclays U.S. Aggregate Index, and 20% HFRX Global Hedge Fund Index. The “all-growth” portfolio is comprised of 100% MSCI All Cap World Index.