Balanced Portfolios: Keeping it Real
By Adam Butler and Mike Philbrick
February 20, 2013
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
It's important for clients to understand what they're getting themselves into with a typical balanced portfolio.
The following charts show the distribution of real historical returns over 1, 5, and 10 year horizons for a portfolio consisting of 60% stocks and 40% bonds.
Some facts clients might not be aware of:
- A balanced portfolio can drop as much as 35% in any given year
- Balanced portfolios have delivered negative real returns over 10 year periods 15% of the time
- Over all rolling 5 year periods, a balanced portfolio has yielded real returns ranging from -10% through +22% annualized
Chart 1. Probability of negative real returns to a 60/40 U.S. stock/bond portfolio over 1, 5 and 10 year horizons
Source: Shiller, Federal Reserve
Chart 2. Range of real returns to a U.S. 60/40 stock/bond portfolio over 1, 5, and 10 year horizons
Source: Shiller, Federal Reserve
Chart 3. Frequency distribution of real returns to U.S. 60/40 stock/bond portfolio over rolling 12 month periods
Source: Shiller, Federal Reserve
Chart 4. Frequency distribution of real returns to U.S. 60/40 stock/bond portfolio over rolling 5 year (60 month) periods
Source: Shiller, Federal Reserve
Chart 5. Frequency distribution of real returns to U.S. 60/40 stock/bond portfolio over rolling 10 year (120 month) periods
Source: Shiller, Federal Reserve
Note: Here are some additional Advisor Perspectives articles by the Butler-Philbrick team:
- The Full Montier: Absolute vs. Relative Value
- Don't Take Our Word For It
- Tactical Alpha: The Case for Active Asset Allocation
- Equity Portfolio Optimization with Factor Tilts
- Permanent Portfolio Shakedown Part 1
- Permanent Portfolio Shakedown Part 2
- The Permanent Portfolio Turns Japanese
- Estimating Future Returns: New Update
- Retirement's Volatility Bogeyman
- 2277 Stocks and Still Not Diversified?
- How to Beat the Market, and Why Most Investors Don't
- Volatility Management for Better Absolute and Risk-Adjusted Performance
- Diversification: Still the Only Free Lunch
- Adaptive Asset Allocation: A True Revolution in Portfolio Management
- Adaptive Risk Parity for a Better 'Balanced Fund'
- Risk Parity: Past Its Prime
- Track Records are Rubbish (or Why Managers are Factors in Drag)
- Predicting Markets, or Marketing Predictions
- Balanced Portfolios: Keeping it Real
Adam Butler and Mike Philbrick are Portfolio Managers with Butler|Philbrick|Gordillo & Associates at Macquarie Private Wealth in Toronto, Canada.
(c) Butler|Philbrick|Gordillo & Associates, 2011
GestaltU
