The balanced portfolio had a terrible 2022. In fact, it was just about the worst ever. Stocks were down and bonds had a rough ride delivering negative returns thanks to the rising yield environment. As rates go up, bond prices go down. Inflation was the culprit. Central bankers created a rising rate environment to cool the economy in the attempt to tame inflation. It was almost a year ago that I asked ‘what’s up with balanced portfolios in 2022’. Looking back on that post, things have played out as suggested in the post. And as a recession looks likely in 2023, bonds and the classic 60/40 balanced portfolio might be back in business. It’s the balanced portfolio journey on the Sunday Reads.
Here’s the post from April of 2022 – what’s up with balanced portfolios in 2022. At that point in time …
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%
And when we looked at asset allocation ETFs, we saw that the more bond-heavy portfolios (top of that list) were down more than equity-heavy portfolios …
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%
And while this post covering the returns of the core ETF portfolios shows that the balanced portfolio model has worked quite well over the last several years, 2022 was a down year. A typical 60/40 portfolio was down about 11% in 2022.
The all-weather model was performing well, as I wrote …
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.
A key to managing a balanced portfolio is rebalancing on schedule, or rebalance when certain assets perform well as other assets floudner. We move monies from the winners to the losers. In the 2022 post I suggested …
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.
In anticipation of a recession, bonds have started to work again from late 2022, with more robust gains in the last 3 months.
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.
Also from that 2022 post …
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.
Bonds started to make more sense, delivering greater yields, with the potential of working as stock market shock absorbers.
Stocks are the unruly kids. Bonds are the adult in the room.
Ray Dalio thinks the economy is at a turning point. If we enter a recession, the U.S. market might not be a friendly place …
This will likely leave no sector unscathed, but the hardest hurt ones will likely be four out of the five in SPY’s portfolio (making up 57.77% of its total holdings): technology (26.23%), financials (12.71%), consumer cyclical (10.39%), and industrials (8.44%).
The financials and energy-heavy Canadian stock market is not well positioned for a recession, either.
That why for retirees and near retirees it might make sense to also consider the defensive sectors for retirement. They were twice as good in the last major recession. They can work in concert with bonds and cash.
And while I would guess that inflation stands a very good chance of being under control, I’m not going to invest based on that guess. I continue to hold those inflation fighters.
The rate hike hiatus in Canada
In Canada we are “enjoying” the rate hike hiatus and fixed rates are coming down as Ron Butler shows …
From that late January rate hike hiatus post, and from me …
That said, the rate hikes have not worked their way through the economy. In fact, many suggest that we’ve felt almost no economic damage from the rate hikes. There is a lag affect; it can take a year or two for hikes to be felt in full. But let’s call the rate hike hiatus good news.
Falling yields might be good for homeowner wannabees and for balanced portfolios.
The week in review and Sunday Reads
Kyle Prevost offered another very good wrap in Making Sense of the Markets for MoneySense. We have more banks breaking. And because of that, the Fed in the U.S. offered a modest 0.25% rate hike. The banking stress should offer some economic tightening helping the Fed in their inflation fight.
From Kyle …
The worry expressed by economists is that if banks have to shore up their balance sheets as a result of their government bonds being “marked to market”—effectively admitting they’re not worth as much as they used to be—then they’ll not be able to lend out as much money.
It’s just basic math: If you want banks to have more money on hand, they shouldn’t lend as much out. If that cycle gains too much momentum, it could result in very few people or companies being able to borrow and spend.
Of course, a slowdown in lending might be exactly what Dr. Deflation ordered to cure our nasty bout of inflation.
And Martin Pelletier suggests that the banking crisis is not 2008, but …
While no one knows what will happen, the market decline usually happens after the last rate hike. And as always, remember, lower prices are very good in the accumulation stage (and often in the rebalancing process).
Here’s some context on inflation and recessions …
Keeping it simple
On My Own Advisor, the theme continues with keeping investing simple. That is a very good post with many links and considerations. I will often write that investing can and should be one of the most simple and rewarding things we do in life.
And here’s the week in review courtesy of Dividend Hawk.
On Tawcan, Bob offers his Februrary portfolio review. Bob is a prolific saver and investor and no stranger to this blog.
In case you missed it, here’s the update on Passive Canadian Income.
And here’s Matt at All About The Dividends.
A tally on many in the Canadian self-directed crowd from Vibrant Dreamer.
On stocktrades.ca, Dan gives you 11 stocks to consider in 2023.
Not surprisingly, FiPhysician is very popular with Cut The Crap Investing Readers. This week – the 3-ETF portfolio across various account types. The post is targeted to our U.S. readers, but Canucks can certainly get something out of that as well.
And one of my favourite ETFs welcomes a new name (AAPL) and a previous constituent (XOM).
Thanks for reading. Don’t forget to follow this blog. It’s free.
Please, Cut The Crap Investing …
And then, earn a break on fees by way of many of these partnership links.
CANADA’S TOP-RANKED DISCOUNT BROKERAGE
Cut the Crap Investing readers can earn a break on fees at Questrade by way of that partnership link. At Questrade, you can buy ETFs for free.
Here’s Canada’s top-performing Robo Advisor, Justwealth.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
OUR SAVINGS ACCOUNTS
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 2.5% and 3.5%. You’ll find some higher rates on GICs, recently updated and increased to 3-5%. They also offer U.S. dollar accounts. We use EQ Bank, they have been awesome.
OUR CASHBACK CREDIT CARD
We make between $50 to $70 every month! And that’s on everyday spending. There are no fees with …
Last month we received $45 in cash. Spending is down, yes! Less on gas, less on restaurants, less on groceries – our 2% cashback categories.
While I do not accept monies for feature blog posts please click here on the mission and ‘how I might get paid’ disclosures. Affiliate partnerships help me (try to) pay the bills for this site. That will allow me to keep this site free of ads and easy to read.