Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

5 Reasons why the 60/40 Portfolio is NOT Dead

Posted By |

By Bilal Hasanjee, Senior Investment Strategist, Vanguard Canada

Special to the Financial Independence Hub

In the current record-breaking inflation and rising interest rate environment across all major markets, stocks and bonds have declined in values simultaneously.

As a result, many analysts and commentators have speculated on the death of the 60% stock/40% bond portfolios. But we have seen this before. Based on Vanguard’s research, balanced portfolios have proved critics wrong before and we believe they will prove them wrong, again. Here are five reasons why a 60% stock/40% bond portfolio is NOT dead.

Reason 1: Stock-bonds simultaneous decline is not long lasting

A simultaneous decline or positive correlation in stocks and bonds has typically not lasted long and the phenomenon has never occurred over a three-year span. A similar trend is visible on a 60/40 (stocks/bonds) portfolio.

Drawdowns in 60/40 portfolios have occurred more regularly than simultaneous declines in stocks and bonds; however, their frequency of occurrence also declines over longer periods. More regular occurrence is due to the far-higher volatility of stocks and their greater weight in that asset mix. One-month total returns were negative one-third of the time over the last 46 years. The one-year returns of such portfolios were negative about 14% of the time, or once every seven years or so, on average.

Figure 1

Source: Vanguard

Data reflect rolling period total returns for the periods shown and are based on underlying monthly total returns for the period from February 1976 through April 2022. The S&P 500 Index and the Bloomberg US Aggregate Bond Index were used as proxies for stocks and bonds.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Stock-Bonds correlation remains negative in the long term

Our study of 60-day and 24-month stock-bonds rolling correlations from 1992 to 2022 suggests that over a long-term, correlation between stocks and bonds remains negative. That said, long-term inflation is one of the determinants of correlation between the two asset classes

Figure 2: Long-term correlations expected to remain negative

Notes: Rolling correlations are calculated on total returns of the S&P 500 Index and the S&P U.S. Treasury Bond Current 10-year Index, using daily return data for the period between 1989 and May 31, 2022.

Sources: Vanguard, using data from Refinitiv, as of May 31, 2022. Past performance is no guarantee of future returns.

The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Reason 2: Long-term expected returns from 60/40 are still achievable

The goal of a 60/40 portfolio is to achieve long-term annualized returns of roughly 7%. This is meant to be achieved over time and on average, and not every year. The annualized return of 60% U.S. stock and 40% U.S. bond portfolio from January 1, 1926, through December 31, 2021, was 8.8%.1 On a forward-looking basis, Vanguard Capital Markets Model (VCMM) projects the long-term average return to be around 7% for the 60/40 portfolio, over the next 10 years. Market volatility means diversified portfolio returns will always remain uneven, comprising periods of higher or lower: and, yes, even negative returns.

The average return we expect can still be achieved if periods of negative returns (like this year) follow periods of high returns. During the three previous years (2019–2021), a 60/40 portfolio delivered an annualized 14.3% return, so losses of up to –12% for all of 2022 would just bring the four-year annualized return to 7%, back in line with historical norms.

Our forecast points to improved stocks and bond returns

On the flip side, the math of average returns suggests that periods of negative returns must be followed by years with higher-than-average returns. Indeed, with the painful market adjustments year-to-date, the return outlook for the 60/40 portfolio has improved, not declined. Driven by lower equity valuations and higher bond yields, our 10-year annualized average return outlook for the 60/40 is now higher by 1.3 percentage points than before the recent market adjustment.

Reason 3: Selling bonds in a rising rate environment is like selling low and buying high (in short, don’t try to time the market)

Chasing performance and reacting to headlines are doomed to fail as a timing strategy every time, since it amounts to buying high and selling low. Far from abandoning balanced portfolios, investors should keep their investment programs on track, adding to them in a disciplined way over time. Continue Reading…

Retired Money: Suddenly Retired while Covid lingers

Posted By |

My latest MoneySense Retired Money column looks at how the last two years of the Covid pandemic may have caused many older workers to find themselves suddenly retired, whether by their choice or not. You can find the full column by clicking on the highlighted text: Does it make sense to retire when we’re still in a pandemic?

Depending on when you had originally planned to retire — typically the traditional Retirement age in Canada is around 65 — the unexpected loss of Employment income may create any of several possibilities.

A major one is Semi-Retirement: a sort of half-way house between full employment and traditional full-stop Retirement. They may embrace a so-called Portfolio Career, generating multiple streams of income: employer pensions, government pensions, investment income, annuities, self-employment income; rental income, book royalties, speaking fees and the like.

Those in their early 60s may decide re-employment is not in the cards, which means a severance package may be your ticket to launching an encore career and becoming self-employed.

While self-employment may seem scary to those who spent more of their careers as salaried employees, self-employment doesn’t necessarily mean starting a business and employing others. Freelancing or consulting is typically a one-person gig; it may even just mean cobbling together several part-time jobs.

The column also addresses the possibility of downsizing to a smaller or less expensive place in the country, which many sudden retirees have done during the Covid era. Of course, the whole WorkfromHome phenomenon has shown how new technologies like Slack and Zoom make it possible to work remotely from anywhere with a reliable Internet connection. Two years into living with the pandemic, such technologies seem to have become permanent fixtures of working, whether remotely or a hybrid of commuting and telecommuting.

Those who were already near retirement and who enjoy good employer pensions and/or solid nest eggs from RRSPs, TFSAs and other savings, may decide they can get by without finding new employment or braving the waters of self-employment.

Time may be worth more than money

The column quotes financial marketer Darin Diehl, laid off at age 60 before Covid: “Even before Covid, my wife and I were thinking about whether we’d stay in our Mississauga home for the transition years into retirement, or downsize and relocate out of the city … Covid caused us to think about our options more thoroughly.” Continue Reading…

Canadians fret about meeting day-to-day expenses and inflation’s impact on Saving

Posted By |

With rising inflation driving up the costs of goods and services, a Scotiabank survey released Monday reveals over half [53%] of Canadians are worried about their ability to pay for day-to-day expenses. The majority (78%)of expect to be spending more on basic necessities like groceries and food, or gas (71%), and 53% expect to spend more on utilities (53%). 47% say these issues are impacting their ability to save for longer-term financial goals and 37% feel it’s impacting their current standard of living. Scotia Economics expects inflation to peak later this summer before starting a slow descent to 3.6% in 2023 and back to target by 2024.

“Canadians are feeling heightened levels of anxiety as a result of inflation: especially younger people and women who were also hardest hit by the pandemic,” said D’Arcy McDonald, Senior Vice President of Retail Payments and Unsecured Lending at Scotiabank via a press release. “The cost of everything is on the rise and Canadians are worried about their ability to afford the essentials such as food and gas. At the same time, there have never been so many jobs in the Canadian economy, wages are picking up, and inflation will come down over time.”

Financial stress hits differently across the country

Where Canadians live dictates how much they believe rising costs will impact their finances and ability to pay their bills. 49% of residents in the Atlantic think inflation is having a major impact on their ability to set and stick to a budget, compared to 36% of residents of British Columbia and Quebec. 

When it comes to feeling financial anxiety, 57% of Quebecers are least likely to be concerned about their ability to pay for day-to-day expenses, compared to residents of Alberta (45%), Manitoba/Saskatchewan (44%), Ontario (43%), and the Atlantic (39%).

The young are most impacted and most concerned

Women, younger Canadians, and those with lower household incomes are significantly more concerned about their financial situation over the next few months. Women (44%) are more likely than men (35%) to say inflation and the rising costs of goods and services is having a major impact on their ability to set and stick to a budget.

Canadians between the ages of 18-34 (45%) and 35-54 (46%) say inflation and the rising costs of goods and services is having a major impact on their ability to set and stick to a budget, compared to Canadians 55+ (30%). Continue Reading…

Why the highest-yielding investment funds might not be the best for ETF investors

Posted By |

 

The investment funds claiming the highest yields aren’t always the best for every investor

By David Kitai,  Harvest ETFs

(Sponsor Content)

A look at the “Top Dividend” stock list on the TMX website will show an investor a selection of the highest yielding investment funds and stocks available in Canada. That list features some astronomically high numbers on investment funds: yields upwards of 20%. An income-seeking investor might look at those numbers and rush to buy, believing that with a 20%+ yield, their income needs are about to be met.

As attractive as the highest-yielding investments might appear, there are a wide range of other factors for investors to consider when shopping for an income paying investment fund. Investors may want to consider the crucial details of how, when and why that yield is paid as income: as well as their own risk tolerances and investment goals. This article will outline how an investor can assess those factors when deciding what income investment fund is right for them.

Looking ‘under the hood’ of the highest-yielding investment funds

If you see a big yield sticker on an investment fund in excess of 20%, you may want to look more closely at the details of its income payments.

Because income from investment funds is not always solely derived from dividends, the income characteristics will be listed under the term “distributions.” Information like the distribution frequency and the distribution history will tell a prospective investor a great deal about a particular investment fund’s high yield.

Investment funds will pay their distributions monthly, quarterly, or annually. By looking at the distribution frequency of an investment fund, investors can assess whether an investment fund meets their particular cashflow needs.

A useful way to assess the track record of an investment fund is by looking at the distribution history page published on its website. This will show how much income was paid on each distribution. Some funds have very consistent distributions history, while others fluctuate frequently over time. The distributions history can be a useful way to assess the reliability of the income paid by an investment fund.

Assessing these characteristics can be a useful first step in deciding whether an income investment is right for you. But investors should also consider why the yield number next to an ETF is so high.

Is the high-yield number temporary?

The yield numbers next to investment funds on a resource like the TMX “Top Dividend” list reflect the most recent distribution paid by an investment fund or stock. In the case of investment funds, that distribution could have been a one-off ‘special distribution.’

A special distribution could be the result of a wide range of factors. For example, one of the fund’s holdings could have paid a significant dividend that is being passed on to unitholders. Special distributions are often accompanied by a press release. Continue Reading…

How Low-Volatility ETFs can help in this environment

Posted By |

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

With recent market volatility, investors are demanding solutions that stay afloat during market ups and downs. When looking at behavioural finance studies around loss aversion, an interesting finding arises that people’s fear of loss is (psychologically) twice as powerful versus the pleasure they experience from gains. This is one reason we have seen investors pulling money out of the markets in the past couple months. In reality, this may be a disservice to themselves, if they could just stay invested in a solution that could ease those bumps in the road, they would be better off. Low Volatility investing is one such solution.

So, what is Low Volatility (Low Vol) Investing? Well, it is an approach to investing that allows one to gain equity exposure for some possible growth in their portfolio while providing downside protection.

The chart below (long-term historical performance of the MSCI ACWI – global equities) perfectly demonstrates this. Low Vol is sitting a little bit higher than the broad market (from a returns aspect) but, yet significantly reducing risk. Low Vol sitting at around 10%, whereas the average equity risk is approx. around 15%.

Measuring Low volatility and BMO ETFs’ Approach

Low-volatility is a type of factor-based investing, which is a process that is repeatable and disciplined in its execution. Therefore, in order to invest in this manner, you need to use metrics to identify between what is considered a low volatility stock vs. a high volatility stock. There are a lot of different approaches in the market. The two most prevalent are the Low Beta and Standard Deviation methodologies.

Beta is a risk metric that measures an investment’s sensitivity to fluctuations in the broad market (market sensitivity). The broad market is assigned a beta value of 1.00, an investment with a beta less than 1.00 indicates the investment is less risky relative to the broad market. Low beta investments are less volatile than the broad market and can be considered defensive investments. Over the long term, low-beta stocks may benefit from smaller declines during market corrections and still increase during advancing markets. Additionally, low-beta stocks tend to be more mature and provide higher dividend yield than the broad market. Continue Reading…