What’s the right investment strategy for 2023?

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*This content is brought to you by Brenthurst Wealth

By Mags Heystek*

As we reflect on a rather disappointing year for investors, it’s definitely worth considering what 2023 will bring. The sad truth of it is that we can’t tell with any certainty what to expect.

Yes, the pace of inflation is expected to slow down after many developed economies reached record-high numbers. This slowing of inflation and possible lowering of interest rates should have knock-on effects on markets, hopefully bringing some cheer to beaten-down investors.

But we don’t know this for certain. Just as we didn’t know that Russia would invade Ukraine in February this year.

It’s because of these unknowables that wealth managers and advisors propose strategies that help you ride out market volatility. A popular strategy that’s been used for decades is the 60/40 method that aims to diversify your portfolio by holding 60% of your assets in listed equities, and the remainder in bonds.

As you’re probably aware, diversification of your risks is one of the fundamental building blocks of a successful portfolio. And this is the cornerstone of the 60/40 approach as stocks tend to rise when bond yields fall, and vice versa.

A typical 60/40 portfolio aims to produce long-term annualised returns of around 7%. Which has been shown to be accurate according to data from US investment manager Vanguard. This data shows an 8.8% annualised return of a 60% US stock and 40% US bond portfolio between January 1, 1926, and December 31, 2021.

Is the 60/40 approach right for you?

The best measure of whether this approach works is to look at the historical data. As already shown, long-term returns do match up with expectations.

Vanguard reports that although simultaneous declines in stocks and bonds are not unusual, over the past 46 years investors have never had three years of losses in both asset classes. In fact, the 60/40 portfolio isn’t expected to produce winning returns year on year. Rather, it relies on the market recovery that follows a bad year (like 2022).

We can look at recent returns to prove this point. Vanguard says that between 2019 and 2021, a 60/40 portfolio delivered an annualised return of 14.3%, meaning that losses of up to -12% for all of 2022 would simply bring the four-year annualised return to 7%.

So, the theory does appear to hold true. The question remains, though, is the 60/40 approach right for you?

Why have an individualised investment portfolio?

The answer to this question will differ from one person to the next. And that answer will depend on your personal goals, your life stage, available resources, and other factors.

If you’re starting to consider your options or want to change up your portfolio, then my first piece of advice would be to not base your decisions on returns over a short time frame. The numbers quoted by Vanguard are a great example of this: over 3 years, a 60/40 portfolio delivered 14.3%, but over 40+ years that’s closer to 7% or 8%.

A realistic expectation then, if this is your preferred investment strategy, is that your portfolio will grow at 7% or 8% a year if you’re invested in US stocks and bonds. If your portfolio was constructed of South African assets, then those returns would in all likelihood be different.

Understanding these nuances in popular investment philosophies is how advisors add value to your investment planning. Very few individual investors have the resources or inclination to follow markets and analyse data in the way that we do. What this means is that you’re not making guesses in your long-term investment decision-making.

The second lesson from the 60/40 example is that market highs and lows eventually even out your returns over the long run. The unspoken message here is that time in the market, not timing the market is the only way to achieve these long-term returns.

However, the truth is that a 60/40 portfolio is not appropriate for everyone. And nor is a 30/70 portfolio, or any other of the popular investment theme or current fad.

Your portfolio has to reflect your long-term goals, within your current context. So, if you’re in your early 20s or even 30s, then a 60/40 portfolio could be robbing you of the higher returns that an equity-only portfolio would provide. Because of the long time horizon, you can recover from market dips, crashes even, as long as you stay in the market long enough.

For this reason, I advise clients to ignore amazing-sounding investment phrases and philosophies. Even if they come from the likes of Warren Buffet. Rather focus on your own goals and how you can achieve that by applying sensible investment strategies.

And yes, it may come down to adopting the 60/40 approach, but only if that’s going to get you to your goals.

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