What Happened To Your 60 40 Portfolio In 2022?
What happened to the Bonds in your 60% Equity/40% Fixed Income Portfolio in 2022? Weren’t they supposed to be the safe part of your investments?
“This year’s bond crash will go down in the history books as an extreme: a 24.8% plummet for long-term U.S. Treasuries through Friday (12/02/22), as judged by Vanguard Long-Term Treasury Index Fund ETF (VGLT). Assuming bonds end the year at their current level, their loss would be far and away the worst since 1793, according to a database maintained by Edward McQuarrie, an emeritus professor at Santa Clara University. In fact, such a loss would be nearly 4.0 standard deviations below the average annual return of the past 229 years.” (WSJ, Hulbert, Dec 4, 2022)
Risk is a characteristic of investing in both stocks and bonds. Many investors were lulled into believing that in a 60% stock 40% fixed income portfolio, bonds would provide safe haven in a falling stock market. In fact, in many cases bonds underperformed stocks in 2022, so what happened.
Bonds lose value when interest rates rise, and that loss is magnified the longer the duration or average maturities of Bonds. As an example, if you held a bond with a 1 year duration and a bond with similar characteristics but a 10 year duration. If interest rates rise by 1% you would expect the principle value of the 1 year bond to fall by about 1% and the 10 year bond to fall in value by about 10%.
Coming into 2022 we were seeing the highest rate of inflation in decades and the fed was telegraphing that it would probably need to begin raising rates in 2022 to cool inflation. At the same time, bonds had continued to trade at historically low interest rates and at a historically low spread between short term and intermediate /long term bonds. In an environment like this we believe there was more to risk than there was to reward to remain invested in mid- and long-term bonds.
What forethinking advisors did for their clients was to shorten the duration of bond portfolio by strategically moving mid- and long-term bond to short term maturities. While this still would have kept bonds flat to mild losses (generally less that 2%) it a far cry from the 15-23% losses suffer by intermediate term and lang term bond funds.
It is easy to be a Monday morning quarterback, but in this case there were certainly strong signal that an astute investment advisor or investor could have recognized to help protect a 60% equity / 40% Bond portfolio in 2022.
The Fiduciaries at Winthrop Partners have worked with Business Families with complex holdings in a variety of roles. Let our diversity of experience work for you. Contact Brian Werner CFA, CFP for a free consultation. 412-480-1291 [email protected]
WINTHROP PARTNERS is a Fee-Only Fiduciary Wealth Advisor and Investment Manager with offices in downtown Pittsburgh, eastern Pittsburgh, Doylestown, PA, Buffalo, NY, and Miami.
Disclosures:
The information provided herein is for educational purposes only and should not be considered investment, tax, accounting, or legal advice. Winthrop Partners does not provide tax advice or legal advice. Before taking any action, you should first consult with a tax or legal professional. The information contained herein was obtained from sources believed to be accurate, but we cannot guarantee that it is accurate or complete.
Brian Werner is a Managing Partner at Winthrop Partners. He has more than 25 years of experience in investments, financial planning, entrepreneurial ventures, corporate finance, and banking. Prior to joining Winthrop Partners, Brian was the First Vice President and a Senior Wealth Advisor for First Niagara, where he led the development of First Niagara’s Western Pennsylvania Private Client Services and served on its western Pennsylvania operating committee. He also held roles with PNC/National City, Greycourt Investment Advisors, and Linnco Future Group, Chicago Board of Trade. Brian is a Chartered Financial Analyst and Certified Financial Planner. He earned his MBA from Duquesne University, Magna Cum Laude.