Q: I continue to struggle to find the right level of diversification, especially fixed income in my portfolio. One of the strong reasons for my struggle is the recent very strong bond performance and concerns that I am too late.
The standard rule of thumb 60/40 blend is challenged here. I am wondering if you saw this article on the Globe’s website. Could you take a look at the article and share your thoughts on Merrill Lynch’s thesis ? As well as the suggestion of using dividend paying stocks as, at least, a particle substitute.
Thanks.
.... from the Globe and Mail Investor website ( a partial excerpt...)
The 60-per-cent fixed income, 40-per-cent equity portfolio has been an important benchmark for balanced funds and overall asset allocation for decades.
Merrill Lynch analyst Jared Woodard, however, believes the 60/40 portfolio is now far less relevant because of the rising risks in bond markets.
In The End of 60/40, Mr. Woodard cites three reasons that bonds may no longer provide the portfolio stability and consistency they once did.
The first reason is that bond portfolios have not been providing diversification. He writes, “The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated."
The problem in recent years is that periods of major market weakness have seen both bonds and equities fall.
In the U.S., longer duration government bonds have generated terrible risk-adjusted returns over the past three years - lower than junk bonds and emerging market equities. This means that investors who bought Treasury bonds for steady returns and lower portfolio volatility have seen volatility actually increase.
The data is U.S. based, but the performance of U.S. and Canadian long-term bonds has been virtually identical, as this chart posted to social media underscores.
Mr. Woodard’s final warning about bonds concerns overcrowding. He notes that globally, the fund manager allocation to U.S. Treasury debt is close to a 20 year high. So far in 2019, investors worldwide have sold US$208-billion from equity funds and bought $339-billion worth of bond funds.
With government bonds so popular, the analyst is concerned that “Crowded positioning means that natural swings in bond prices may be exacerbated as active investors rebalance their holdings.”
To the extent that Canadian investors have made the same switch to fixed income – and the 38 per cent increase in the market capitalization of the iShares Core Canadian Universe Bond Index ETF suggests fixed income has been popular domestically - these risks are also present here.
The standard rule of thumb 60/40 blend is challenged here. I am wondering if you saw this article on the Globe’s website. Could you take a look at the article and share your thoughts on Merrill Lynch’s thesis ? As well as the suggestion of using dividend paying stocks as, at least, a particle substitute.
Thanks.
.... from the Globe and Mail Investor website ( a partial excerpt...)
The 60-per-cent fixed income, 40-per-cent equity portfolio has been an important benchmark for balanced funds and overall asset allocation for decades.
Merrill Lynch analyst Jared Woodard, however, believes the 60/40 portfolio is now far less relevant because of the rising risks in bond markets.
In The End of 60/40, Mr. Woodard cites three reasons that bonds may no longer provide the portfolio stability and consistency they once did.
The first reason is that bond portfolios have not been providing diversification. He writes, “The core premise of every 60/40 portfolio is that bonds can hedge against risks to growth and equities can hedge against inflation; their returns are negatively correlated."
The problem in recent years is that periods of major market weakness have seen both bonds and equities fall.
In the U.S., longer duration government bonds have generated terrible risk-adjusted returns over the past three years - lower than junk bonds and emerging market equities. This means that investors who bought Treasury bonds for steady returns and lower portfolio volatility have seen volatility actually increase.
The data is U.S. based, but the performance of U.S. and Canadian long-term bonds has been virtually identical, as this chart posted to social media underscores.
Mr. Woodard’s final warning about bonds concerns overcrowding. He notes that globally, the fund manager allocation to U.S. Treasury debt is close to a 20 year high. So far in 2019, investors worldwide have sold US$208-billion from equity funds and bought $339-billion worth of bond funds.
With government bonds so popular, the analyst is concerned that “Crowded positioning means that natural swings in bond prices may be exacerbated as active investors rebalance their holdings.”
To the extent that Canadian investors have made the same switch to fixed income – and the 38 per cent increase in the market capitalization of the iShares Core Canadian Universe Bond Index ETF suggests fixed income has been popular domestically - these risks are also present here.
