The year 2022 is one that most investors might wish to forget. In addition to the bear market in equities caused largely by rising inflation and related economic uncertainties, we saw steep losses in bonds due to similar factors. In related news, though the 60/40 portfolio (60% stocks/equities, 40% bonds/fixed income) has been the mainstay of moderate-growth investors for decades, the poor recent returns in both asset classes may be causing some to wonder if it can be expected to deliver in the future as it has in the past.
As we all have heard so often, “past performance is no guarantee of future returns”; this disclaimer remains as true today as it ever was. On the other hand, a look back at history can be instructive.
First of all, it’s worth noting that the performance of 2022 is actually in the middle of a list of “worst of” records in the markets. For example, the -18.6% return of a 60/40 portfolio from January to September 2022 was only two-thirds of the loss it experienced from November 2007 to February 2009 during the worst of the Great Recession.
SOURCE: Dimensional Fund Advisors, Inc. Based on a portfolio of 60% S&P 500 Index, 40% US Treasury 5-year notes, January 1926 – September 2022. Past performance is no guarantee of future results; indexes are not available for direct investment.
Perhaps more important than the look in the “rear-view mirror” however, is what we might expect to see in the road ahead. If we look at how a 60/40 portfolio performed following market declines of 10% or more since 1926, we notice that on average, returns have been favorable in the following one, three, and five-year periods.
SOURCE: Dimensional Fund Advisors, Inc. Based on a portfolio of 60% S&P 500 Index, 40% US Treasury 5-year notes, January 1926 – September 2022. Past performance is no guarantee of future results; indexes are not available for direct investment.
In other words, investors holding 60/40 portfolios during the “doldrum” periods had a reasonable expectation, based on historical performance, of seeing their assets exhibit strong increases in value, once the next upturn finally got underway. The key here, of course, is that those who “stuck to the plan” through the tough times generally did well over the longer haul.
All this is easier to remember, of course, when the rising tides are lifting all boats. But even in the troughs, investors would do well to have confidence in the ultimate resilience of the markets. Just as athletes must learn to press on through fatigue and the pain that comes with the contest, investors need to remember the importance of remaining committed to the long-term strategy and avoiding the all-too-frequent distractions posed by short-term market movements. In time, staying the course will almost always prove to have been the wise decision.
