Multi-asset strategies offer resilience in times of volatility

• The turbulence in global equity and bond markets hasn’t changed the fundamental dynamics of multi-asset investing.
• Multi-asset portfolios have a strong track record of recovery following periods of sustained declines in both equities and bonds.
• The outlook for multi-asset portfolios has improved considerably since the start of the year.

There’s no denying it’s been a challenging year for multi-asset investors. The simultaneous sell-off in both global equity and bond markets¹ has led many investors to question the diversification benefits of multi-asset investing in the current market environment—leaving some wondering if balanced portfolios are even still fit for purpose.

As difficult as these times may seem, the case for multi-asset portfolios remains strong. With their historical track record of resilient returns, we believe balanced portfolios can continue to achieve their intended outcomes for disciplined investors who stay the course.

Multi-asset portfolios in context

Much of the focus this year has been on the underperformance of fixed income in multi-asset portfolios. However, it is important to remember that the primary role of bonds in a well-balanced portfolio is to act as a ballast to equities over time, not as a driver of returns. Despite recent declines, we still believe bonds remain the best asset class to act as a counterweight to equities due to the historically low correlation between the asset classes, with bonds often acting as a buffer during periods of equity volatility. In fact, since the late 1980s, global bonds have consistently provided positive returns during the most severe global equity downturns, including the global financial crisis and Covid-19 pandemic². 

Multi-asset portfolios can provide “all-weather” resilience

One of the key features of balanced portfolios has been their “all-weather” ability to deliver long-term outcomes across market conditions. The chart below shows the historical returns of 60/40 multi-asset portfolios following periods when equities and bonds have simultaneously declined over the last 100 years.

3-year performance of 60/40 portfolios after correlated bond and equity market losses, 1920–2022

Past performance is not a reliable indicator of future results.
Source: Vanguard calculations, based on data from Robert Shiller’s website, for the period 1920-2022.
Notes: Stocks: S&P500 returns, Bonds: 10-year US Treasury returns based on linear duration approximation. Returns calculated in USD with income reinvested. ‘Recovery’ defined as time taken for portfolios values to reach initial investment value ($1).

On average, the median portfolio (shown by the yellow line), recovered its initial losses after ten months and provided an average annualised return of about 9% over the subsequent three years. Even when we look at the worst-performing 60/40 portfolios, where the average drawdown was nearly 30%, it took approximately 2.5 years to recoup their losses, after which the portfolios provided an average annualised return of just under 7% for the next three years.

This ‘all-weather’ resilience is not limited to 60/40 portfolios and applies across the risk spectrum. For example, the same analysis of 20/80 portfolios found it took an average of six months to recover their initial losses, after which they provided average annualised returns of 7.6% for the next three years. This is largely because investors who stay the course after periods of low or negative returns benefit from being fully invested right when valuations are at their most attractive, leading to strong total returns when market conditions change.

3-year performance of 20/80 portfolios after correlated bond and equity market losses, 1920–2022

Past performance is not a reliable indicator of future results.
Source: Vanguard calculations, based on data from Robert Shiller’s website, for the period 1920-2022.
Notes: Stocks: S&P500 returns, Bonds: 10-year US Treasury returns based on linear duration approximation. Returns calculated in USD with income reinvested. ‘Recovery’ defined as time taken for portfolios values to reach initial investment value ($1).

Additionally, bonds have historically provided a buffer against recessionary sell-offs that often occur across riskier assets during periods of slowing economic growth. Thinking about the current market, investors who shift away from bonds now could end up locking in their losses while potentially damaging their ability to fully participate in the benefits of their bond holdings when market conditions eventually change.

Staying focused on long-term outcomes

Looking ahead, the outlook for multi-asset portfolios continues to improve, not decline, driven by higher expected future bond yields and lower share valuations³.  According to the latest forecasts from the Vanguard Capital Markets Model (VCMM), the projected 10-year average annualised return for a 60/40 portfolio has increased considerably since the start of the year, from 1.9% to 4.5%—a rise of 260 basis points⁴.

Despite the glimmer of bluer skies on the horizon, it’s important to remember that Vanguard’s balanced portfolios are not designed to anticipate the timing of markets; instead, they ensure investors have broad market exposure through a global portfolio of diversified assets. Over the long-term, history has shown that aggregate returns are driven by a portfolio’s strategic mix of assets—and not by day-to-day tactical moves in portfolio construction⁵.

Still, at times like these, it is natural to want to take action to protect portfolios.  Rather than trying to mitigate the potential impact of short-term market movements, advisers can take faith in the time-tested investment principles of strategic asset allocation that have served investors incredibly well over the long-term.

¹ The Bloomberg Global Aggregate Bond Index Fund (hedged EUR) fell 15% and the MSCI World Stock Index (EUR) fell 13% for the period 1 January 2022 to 30 September 2022. All returns are calculated in EUR. Source: MSCI and Bloomberg.

² Source: Vanguard calculations based on data from Bloomberg. Data between January 1988 to November 2020. See ‘Hedging equity downside risk with bonds in the low yield environment’, Renzi-Ricci, Baynes, January 2021. Equity returns are defined from the MSCI AC World Total Return Index and bond returns defined from the Bloomberg Global Aggregate Total Return Index, hedged to EUR.

³ Source: Vanguard. Based on projections of return outcomes for different asset classes by the Vanguard Capital Markets Model (VCMM) as of 30 September 2022.

⁴ Source: Vanguard. Return outcome distributions are the results of the VCMM and are derived from 10,000 simulations for each modelled asset class. Simulations are as at 31 December 2021 and 30 September 2022. Equity returns comprise EUR equity (MSCI EMU Total Return Index) and global ex EUR equity (MSCI AC World ex EMU Total Return Index). Fixed income comprises EUR bonds (Bloomberg Euro Aggregate Bond Index) and global ex EUR bonds (Bloomberg Global Aggregate ex Euro Index Hedged). Allocation to EUR and global ex EUR assets according to market capitalisation. Returns include income reinvested.

⁵ Source: Vanguard calculations using data from Morningstar, for the period from 3 January 2011 to 31 December 2021. Performance calculated on a NAV-to-NAV basis. Returns calculated in USD with income reinvested and net of fees. For more information, see “Strategic Asset Allocation: A Timeless Solution”, July 2022.