No Sacrifice for Playing It Safe
One of the remarkable story lines of the current market cycle is the way more risk-averse investors have had to give up so little in exchange for a gentler ride. This is another way of saying that bonds have done so well, as central banks anchor interest rates at or below zero.
This bolstering of bond values has flattered what many considered the "standard" balanced portfolio of 60 percent stocks and 40 percent bonds.
Vanguard Balanced Index Fund is a tidy proxy for this simple approach. It's returned 10.3 percent annualized the past five years - far better than history would lead an investor to expect. From 1925 through 2000, this strategy netted 9.3 percent a year, according to Peter L. Bernstein's "The 60-40 Solution."
And recent gains have come with unusually modest pain. The Sharpe Ratio tries to quantify how much return is achieved per unit of volatility, or risk. In the latest five years, Vanguard Balanced's Sharpe Ratio was 1.22 – a stellar result that exceeds what many risk-aware hedge funds seek.
AQR Capital says from 1947 to 2015, the 60-40 Sharpe Ratio was 0.52. So this stock-bond mix has furnished investors with twice as much return per unit of risk since 2011 as in the prior seven decades.
Does this seem like a trend that investors should extrapolate indefinitely? Whether by interest rates rising, stocks pulling back or volatility picking up, it would seem this investment blend is due for some give-back in coming years.