A long-term investment strategy will survive this market.

A long-term investment strategy will survive this market

Periodically, analysts declare the 60% stock/40% bond portfolio to be dead. Recent stock and bond price decreases have led to an increase in their volume. But we’ve been here before. Historically, balanced portfolios are likely to once again disprove the skeptics.

As 2022 nears its midpoint, market, economic, and geopolitical prospects all appear precarious. Inflation is at 40-year highs, the Federal Reserve is sharply reversing monetary policy, the pandemic persists, and supply chain woes have been exacerbated by COVID-19 lockdowns in China and Russia’s invasion of Ukraine, with the latter bringing the Western bloc closer to a war footing than it has been for decades.

Not surprisingly, this perfect storm of negative market factors has pushed stock and bond prices down in lockstep, preventing a balanced portfolio’s normal diversification of risks.

Historical backdrop for diversification of equities and bonds

Our figure demonstrates that brief, simultaneous drops in stocks and bonds are not uncommon. Since the beginning of 1976, when viewed monthly, the nominal total returns of U.S. equities and investment-grade bonds have been negative around 15% of the time. That is approximately one month of joint deterioration every seven months on average.

However, as the time horizon is expanded, combined reductions have occurred less frequently. In the last 46 years, investors have never seen a three-year loss in both asset types simultaneously.

The math behind strategic asset allocation

In the current challenging market situation, down days are easy to remember, do not require elaborate explanations, and may even have a ring of truth. However, such remarks disregard the fundamentals of investing, place an emphasis on short-term performance, and create a serious disincentive for investors to maintain long-term discipline.

Keep in mind:

A strategic  portfolio aims for long-term annualized returns of approximately 7% to 10% . This is intended to be accomplished over time and on average, not annually. In contrast, the mathematics of average returns predicts that negative return periods must be followed by years with above-average returns. 

Timing the market is incredibly challenging, even for professionals, and is guaranteed to fail as a portfolio approach. The markets are extraordinarily effective at pricing unexpected news and shocks, such as the invasion of Ukraine or the fast and synchronised response of central banks to global inflation, very quickly. As a timing strategy, chasing performance and reacting to news is doomed to fail every time because it equates to buying high and selling low. Rather than abandoning balanced portfolios, investors should maintain their investing plans and add to them in a systematic manner over time.

No magic in asset allocation, but discipline and equilibrium

We at Tenjin AI have chosen strategic asset allocation of the portfolio due to its significance as a benchmark. We believe that 60/40 is an appropriate benchmark for an investing plan that seeks moderate growth. The broader and more essential issue is the efficiency of a diversified, balanced portfolio across asset classes, taking into account the investor’s risk tolerance and time horizon.

Some investors with a longer time horizon may require a more aggressive asset allocation mix, such as 80/20 or even 90/10. For those who are closer to retirement or more conservative, 30/70 may suffice. The acceptability of alternative investments for a portfolio is contingent on the choices and circumstances of the investor.

Regardless of what one refers to as a goal asset mix or what is included in a portfolio, successful long-term investment requires perspective and discipline. Investors’ patience is tested by stretches such as the beginning of 2022 and bear markets that have lasted far longer.

This is not the first time that asset allocation and the markets have encountered difficulties, nor will it be the last. Our estimates indicate that additional economic difficulties lie ahead and that market returns will remain subdued. However, asset allocation and its variants are not extinct. Like the phoenix, the immortal bird of Greek mythology that is reborn from its predecessor’s ashes, the balanced portfolio will be reborn from the ashes of this market and continue to reward investors with the patience and discipline to stick with it.

It takes commitment and forethought to construct a long-term investment portfolio that can weather market fluctuations. With the assistance of Tenjin AI, you can diversify your investments so that you don’t have too much in any one place but also don’t have too little. Find out how to divide up your investments by creating your free Tenjin AI Account now.

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