What’s up with balanced portfolios in 2022?

What’s up with balanced portfolios in 2022? Well, they’re down, that’s what’s “up”. Yes stock and bonds can fall together. Bonds don’t appreciate a rising rate environment. Remember, as bond yields increase bond prices fall. They are inversely correlated. A 5-year bond yielding 1.0% is not as attractive as a recently-released 5-year bond paying 2%. Given that, your existing 5-year bond takes a price hit. At times stocks also do not like a rising rate environment. After all, centeral bankers are increasing rates to cool the economy, and these days, slay inflation. Here’s what’s up with balanced portfolios in 2022.

Most investment portfolios are likely in the red in 2022. A basic core portfolio, whether all-equity or the balanced variety, is down about 8% to 9% in 2022. Downturns are a normal and expected part of investing. We take on risk with the prospect of returns that are well above that of a savings account.

The stock and bond scorecard for 2022

• Canadian stocks are up 1.8%
• U.S. stocks are down 9.9%
• International developed markets are down 11.4%
• International emerging markets are down 13.9%

Put ’em all together and a global stock portfolio is down by about 8.0%. For the above, I used the Canadian dollar ETFs that you’ll find on the ETF Model Portfolio page. Those ETFs will take currencies into account.

The balanced portfolios for 2022

For this evaluation I will look to the asset allocation ETFs. Those are well-diversifed global, all-in-one ETF portfolios. You enter one ticker symbol at your discount brokerage, press buy and Bam! – you got yourself a very good portfolio with fees in the range of 0.20% to 0.25%. Or, you can pay an advisor 2% or more to get the same type of mix, ha. 🙂

I will use the iShares asset allocation ETFs for balanced portfolio evaluation.

They have the risk spectrum covered from a range of 20% bonds to an all-equity offering with no bonds. The management fee for all is .18%. Here are the ticker symbols for each portfolio, and the bond to stock allocations.

• XINC is 80% fixed income / 20% equities
• XCNS is 60% fixed income / 40% equities
• XBAL is 40% fixed income / 60% equities
• XGRO is 20% fixed income / 80% equities
• XEQT is 0% fixed income / 100% equities

Here’s the year-to-date performance to April 21, 2022.

• XINC down 8.9%
• XCNS down 8.5%
• XBAL down 8%
• XGRO down 7.4%
• XEQT down 7.0%

There was nowhere to hide in the traditional balanced portfolio. That said if one took more of an all-weather portfolio approach the results would be far superior. In fact the portfolios I run for myself and my wife are very near all-time highs. An all-weather portfolio will include dedicated inflation protection by way of commodities, energy and commodity stocks, plus gold.

An easy inflation-fighting portfolio bolt-on (simply attach to your existing balanced portfolio) is the Purpose Real Asset ETF, ticker PRA.TO. That ETF includes ‘all of the above’.

PRA is up 24.2% in 2022. Canadian energy stocks are up over 40% in 2022.

Don’t forget to take profits and rebalance

The key with any balanced portfolio approach is to rebalance on schedule. Take your gains and move the assets to the asset that’s stinking the joint out. These days, that may mean taking profits from your inflation-fighters and Canadian stocks and moving them to the underperforming assets. Yes, even moving those profits to your bonds.

Inflation may have peaked, who knows? Or troubling inflation could stick around for years or a decade. As a retiree or near retiree you probably don’t want to guess and make a portfolio decision based on that guess.

If you’re in the accumulation stage, keep buying. It’s that simple. Your stocks and bonds are somewhat going on sale. And given the potential for stocks to beat inflation over the longer term, you might ignore the need for dedicated (near term) inflation protection. The key is to always invest within your risk tolerance level. Those are the words that I have likely repeated the most on this blog. An investment plan is of no use, if you can’t stick to that plan.

Stock markets have you spooked? Here’s the answer.

Bonds? Well ya!

If you need to manage the portfolio volatility, you need to manage the portfolio volatility. Meaning, your risk tolerance did not change just because bonds are getting hurt. You still need to manage the risks.

During a stock market correction (and/or recession) bonds will be there to do their thing. That is, go up when stocks get crushed.

These days the bond market in Canada pays about 3%.

Just as 'they say' bonds start to become competition with stocks and stock yields. That's why we get a stock market valuation reset on top of the current and ongoing valuation reset.

— CutTheCrapInvesting (@67Dodge) April 22, 2022

If rates continue to go up, sure bond prices will contine to go down. But the bonds and bond funds will continually generate higher yields. Though, you will have to be patient. It can take a while in a core bond fund. If you want to manage the bond price risk, own bond funds with a shorter duration. They will go down less in price, and they can respond quicker in delivering the higher yields in a rising rate environment.

As a retiree think of cash and very short term bond funds as your store of value. The longer duration bond funds are there to offer that stock market shock absorber effect.

I like the idea of that bond barbell. Long and short.

And as one who is semi-retired I have also been titling more toward my defensive stocks while not saying goodye to my wonderful tech growth stocks.

In the personal RRSP portfolio I am up 5% year to date, with the value within 0.7% of its all-time high. Of course this could/will change when we get a major stock market correction and recession. The key is to be aware and prepared.

Portfolio building Zoom call with Dale

This was the messaging from last year. That said, I will do another Zoom call in April. Follow this blog for details.

Next Wednesday, April 27, 2022, I will be hosting a Zoom call. I will cover the basics of building a sensible, low-fee ETF portfolio. A Cut The Crap Investing video covering that topic will be made available pre-video chat. Readers can come prepared with their questions and can also put their portfolio mix on the table, if they’d like. I’ll do my best to answer any questions.

I will send the invite to blog followers. And I will post the details on Twitter. There are 100 spots available for the Zoom call. Last year’s Zoom meeting was a lot of fun, and it was well received.

And here’s your balanced portfolio video homework …

Thanks for reading. Dont’ be shy. We’ll see you in the comment section.

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