INSIGHTS WITH EVALESCO

The 60/40 Portfolio

TOPICS DISCUSSED

Understanding the 60/40 portfolio
Shares and bonds in retirement

Investors have had a pretty tough time this year with losses across many asset classes and for many the typical shock absorbers in portfolios have failed to do what is expected of them. 

Consider that, in both Australia and the United States, many retirees will have a portfolio that has approximately 60% allocated to shares and property, with the remaining 40% invested in cash and bonds. The portfolios are unsurprisingly known as 60/40 portfolios.   

Historically, for investors approaching or in retirement, these types of portfolios have provided investors with the ability to access a portfolio that will grow in value over the medium to long term, whilst also earning an income stream that will outpace inflation. In addition, the balance between shares and bonds, has also provided investors with downside protection in volatile times. 

With that in mind, 2022 has not been a usual market period.

As you can see from the image above, typically when share markets have fallen, bond markets have provided a counterbalance and have increased in value or at least have held true. 2022 has been different due to interests being at record lows, and as inflation has persisted, Central Banks pulled the only real lever available to them and that was to start increasing rates.  

For investors with money in long duration bonds this led to a fall in their portfolios, as can be gleaned from the returns outlined for 2022.   

Investors in the AAN Core, AAN Growth and AAN Sustainable Growth Models have been well protected in the area of fixed income (bonds). For those investors in the AAN Core Model, which is a central part of many of our retirement portfolios, you have been shielded from much of the bond market falls as a result of the Investment Committee moving monies away from long duration fixed income, and into more floating rate securities. As interest rate increases start to ease, this might see us start to rotate back to duration over the coming three to six months. 

Investors in the AAN Growth and AAN Sustainable Models have an allocation to a multi-asset solution managed by Perpetual, which has provided downside protection. 

There is a small silver lining out there, as markets are pricing in better returns for 60-40 portfolios for the year ahead driven in the main by the realisation that now that cash rates have moved, 40% of your portfolio will now start to earn an income. With that in mind, institutional investors have increased expected returns from 4% to 8%. 

Over the coming month we will come back to you with a year in review document with some considerations for the year ahead. 

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