The S&P 500 has dropped 21% year to date, and the Bloomberg Aggregate U.S. bond index has slipped 11%.
As you’re undoubtedly well aware, stocks have tumbled this year, with the S&P 500 sliding 21%.
Bonds are supposed to serve as a hedge for stocks. But the fixed-income market has struggled too, with the Bloomberg Aggregate U.S. bond index dropping 11%. So what’s an investor to do?
Many are flocking to liquid alternative funds – mutual funds and exchange-traded funds whose investments resemble those of hedge funds, The Wall Street Journal reports.
The funds have seen an inflow of $21 billion year to date through May, according to Morningstar Direct, as cited by The Journal. At that rate, the funds’ inflow for all of 2022 would beat last year’s record of $38.3 billion.
Returns are all over the map: The Journal cites one fund with a 38% return so far this year, and others with negative returns of 10%. The average so far this year is positive 17%, according to Morningstar.
In addition to volatile returns, fees for the funds are high, running up to 3%, The Journal reports.
60-40: Dead or Alive?
The traditional rule of thumb called for investors to weight their portfolios 60% to stocks, and 40% to bonds. Shana Sissel, founder of Banríon Capital Management, told The Journal that this model is “dead.”
But Roger Aliaga-Díaz, Vanguard’s chief economist for the Americas, begs to differ.
“Brief, simultaneous declines in stocks and bonds are not unusual,” he wrote in a commentary. “Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time.”
But that’s only part of the story. “Extend the time horizon, and joint declines have struck less frequently,” Aliaga-Diaz said. “Over the last 46 years, investors never encountered a three-year span of losses in both asset classes.”
60-40 Performance
Still, slides in 60-40 portfolios have occurred more regularly than simultaneous declines in stocks and bonds. “This is due to the far-higher volatility of stocks and their greater weight in that asset mix,” he said.
“One-month total returns were negative one-third of the time over the last 46 years. The one-year returns of such portfolios were negative about 14% of the time, or once every seven years, on average.”
But the picture still looks bright for the 60-40 portfolio Aliaga-Diaz said. “The goal of the 60-40 portfolio is to achieve long-term annualized returns of roughly 7%,” he said. “This is meant to be achieved over time and on average, not each and every year.”
The annualized return of a 60-40 portfolio from 1926 through 2021 was 8.8%. And going forward, Vanguard forecasts the long-term average return will be around 7%.
Of course, that doesn’t imply it will always be smooth sailing, Aliaga-Diaz said.
“Market volatility means diversified portfolio returns will always remain uneven, comprising periods of higher or lower — and, yes, even negative — returns.”
Moreover, the math of average returns suggests strong performance by the 60-40 portfolio should follow weak performance and vice versa.
