WHERE DOES A BALANCED 60/40 PORTFOLIO GO FROM HERE?

By Drew Finerty


Hello all,

Well, to continue a very strange 2020, we are seeing new cases multiplying daily around the globe, so I hope this finds you and your families all doing well and keeping safe. The anticipated “Second-Wave” is clearly upon us and the next few months are going to be very stressful and optimistic, now that we are hearing there are a few US Pharma companies that have had over 90% success rate in testing. From what I am hearing, there are more to be announced in the coming month, so that is some great news for light at the end of the tunnel going into 2021. Doctor Bonnie Henry sounds hopeful that some shots could arrive for the very needy in January.

How is the Market Recovery going you ask?

Despite record numbers of new COVID cases & deaths, as well as a slowly improving economy, there does seem to be some market appetite for equities around the globe. Remember all the chatter how the US Election was going to create added volatility to the markets? As history has proved once again, elections rarely have much if any market results based on which party wins. In fact, the Large Cap DOW index is now up over 11% since October 30th, reaching the psychological point of 30,000 briefly this week and the Tech-heavy NASDAQ is touching 12% in the same three weeks, moving over the 12,000 mark for the first time. Even without coming to an agreement over the next financial stimulus in Congress before the election, the optimism of weekly new vaccine testing results, the positive response of Janet Yellen’s appointment as Treasury Director (which has been seen as “market-friendly”) and the fact the US Fed, as well as other global Central Banks, have pledged to keep interest rates near zero for the foreseeable future (+/- 5 years), the markets are pricing in an economic recovery in 2021 & 22. Due to all these factors, inflation is also expected to remain below targeted levels, although the Central Banks will allow it to rise without raising rates for some time. This will help to pay down the high levels of consumer, corporate and government debt, that has risen at unprecedented levels in history, due to the virus.

Interestingly, back in the spring there was a great deal of banter over what type of recovery we should expect. After a quick Initial rebound in the first 100 days, most pundits were predicting a “V” shape bounce back. Given the strange disconnect between Wall Street and Main Street, where it appeared the economic beating was the worst possible scenario, contrarily, the markets were constantly rising, I had envisioned a different shape…the “W”, mostly based on concerns over the second wave and potential volatility around the election. As you can see by the graph below that shows the more broad “S&P 500” US market, both scenarios have played out in the recovery. You can see the early “V” from March to September, followed by the “W” in the Autumn months. The great question is, where do we go from here? That is a great segue into the next bullet…


Is the Balanced 60/40 portfolio still the panacea?

As I hope most of you know and recall, I have always been bullish on a portfolio foundation built with 40% Bonds (Defense) and 60% Equities/Stocks (Offense), given that throughout history and all market conditions, this weighted balance in a portfolio has pretty much been bullet-proof over time. It allows your portfolio to participate in the Growth of Equities over time, while protecting the downside slips in ordinary economic shifts during the expansion & recession cycles. Typically, when interest rates go down, that is good for Equities and Bond prices, which historically rise during this part of the cycle. When interest rates rise (not very often in the past 40 years), the income from the Bonds pay higher yields than current market conditions would return, so it keeps your portfolio balanced and less volatile…that is why it is considered Low/Medium on the Risk Rating ladder, and has averaged 5%-6% over the long term, well ahead of an inflation rate of 2% over the same period. Now, with interest rates soooo very low & expected to stay there for the next number of years, will this portfolio return the performance to match your needs and expectations? If you are comfortable with a 3%-4% return, while inflation tries hard to reach 2% in a slower-growth Global recovery, your “Real Rate of Return” will still be more positive than the only other options of straight bonds (i.e.: a 30 year Government of Canada Bond that is paying 1.6%) or Bank Savings, Term Deposits & GIC’s (paying in a range of .1%-1.2%...ouch).

As a lot of my clients have done over the past six months, re-balancing your portfolio and reassessing your goals, time horizons and risk tolerance is the wisest thing you can do for your family’s financial security, as we move into a new reality post-COVID. Diversifying your portfolio and staying within in your tolerance levels can create opportunities to participate in the types of investments that will lead the new-economy over the long term. If you haven’t yet re-balanced your portfolio and you would like to chat further about a mix that will keep you in your comfort zone, let me know a good time to speak on the phone or arrange a Zoom meeting. We will be keeping the office closed until we see the second wave under control, hopefully by this spring. Given the recent Health Orders from Dr. Henry, I don’t expect we will be in a position to meet in person before the holidays.

Protect you and your loved ones over the Holidays!

As the crazy year that was 2020 comes to a close, I hope you and your family can stay safe and still enjoy the holidays. Our team will be off for a break between December 19th and January 11th…and I am always checking my email or my texts/voicemail, so if anything urgent comes up, I can be available during this time. Just a reminder that the Bond Interest and Dividend payouts are typically paid out to your accounts by year-end and will be automatically re-invested into additional units/shares in your fund, unless you have requested specifically they are to be paid out to your bank account. My next update will be early in the new year…stay safe, wash your hands frequently, wear a mask in public and be sure to social distance yourself whenever possible…all the best…Happy Holidays!


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