SSgA Investment Solutions Group head of Asia-Pacific Mark Wills said while a 60/40 balanced portfolio is effective during ‘normal times’, these periods typically only occur during 65 per cent of an observable market cycle.
“In the other 35 per cent of the cycle [investors] need to think outside the square to preserve their assets,” said Mr Wills.
“The average 60/40 fund is heavily dominated by equity risk and the structure is limited in its defence mechanisms to static diversification and fixed income assets.”
Mr Wills said while fixed income assets can struggle to assist in the preservation of wealth at the best of times, they certainly won’t protect against a slump in equities if yields remain at their current lows.
He said while the rate of return of the average Australian balanced fund achieved a 10.23 per cent return between 2009 and 2014 may be reassuring to investors, they should be careful not to be complacent.
“The trend might have been your friend over the past five years but if you’re a believer in market cycles you know that cycles are typically five to seven years in duration and on average, each decade we experience two significant market withdrawals,” he said.
“Don’t forget the -27 per cent portfolio value drawdown experienced by the median balanced growth fund in 2008, the -1.87 per cent drawdown in 2011 or the 10-year average return of 6.97 per cent.”
He believes if investors want to ensure a portfolio won’t suffer any major losses, there needs to be dynamic asset allocation and a wide array of assets.
“As we see it, a majority of investors are still essentially playing a game of roulette with their liabilities,” he said.
“Now is the time to have a pragmatic conversation about managing this conundrum, knowing the traditional portfolio has its limitations.”
