Keep your eyes on the prize

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 . 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 – July 1989 to September 2022

In the past ten years, up to the end of September 2022, investors would have achieved a more than 55% rise in their purchasing power. In 2022 such a strategy is down -8% before inflation and -16% after inflation.  Although this is disappointing, it sits well within the bounds of expectation for a portfolio like this, as the data in the tables below show.

Table 1:  Tops ten falls and recoveries since July 1989 – before inflation

Table 2:  Tops ten falls and recoveries since July 1989 – after inflation

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:

1. Read, watch or listen to less financial press and commentary.
2. Accept that investing is always a two steps forwards, one step back journey.
3. Try not to dissect your portfolio statement line by line – look at the big picture.
4. Look at portfolio outcomes over the longest time frame you have available.
5. Remember that a fall in value is not a loss unless you sell.
6. Higher bond yields and lower equity prices point towards higher expected returns.
7. Attempting to jump in and out of markets is simply guesswork, and likely to be costly.
8. Place 2022 in the context of your multi-year, or even multi-decade, investment horizon.
9. Keep your eyes on the prize of building future purchasing power over the longer term.
10. Keep the faith – stay invested.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.