Look beyond short-term biases and commit to a ‘foundation’ portfolio

IT HAS been a torrid year for investors and, with most central banks extremely focused on bringing inflation lower – even at the cost of much slower economic growth – it is too early to say we are out of the woods. However, some seem to extrapolate this to suggest that a traditional multi-asset portfolio consisting of stocks, bonds and alternative assets is past its sell-by-date. We totally disagree and believe investors should use the coming months to ensure their foundations are secure so that they can benefit once the situation improves. Nobody knows exactly when that will be, but it will come and history suggests it will not be too far away.

It has been well documented that this year has been a challenging one for investors, with most traditional asset classes – equities, bonds and gold – losing significant value. Even cash, once you take into account inflation, has lost significant purchasing power as well. However, I find it useful to put this in context: Including this year, there have only been 4 years in the past 150 years that we have seen both US equities and bonds lose value. Over the same period, a 60:40 equity-bond portfolio lost value only 9 times. Therefore, what we have seen this year is very rare and is very likely to be relatively short-lived – measured in months from now, but highly unlikely to be measured in years.

Of course, it is natural that after such a performance, investors are sceptical about forward-looking returns. We tend to anchor our forward-looking expectations around many different things, including recent performance. This explains why strong performance over the past 1, 3 and 5 years (disclaimers stating otherwise notwithstanding) is one of the primary decision-making points for many investors. I believe this bias, whether it be after strong gains or after strong losses from different assets, is one of the costliest biases among investors.