The past decade has presented a curious case for investors, with growth portfolios, typically comprising an 80/20 split of equities to bonds, significantly outperforming more conservative balanced portfolios (60/40 allocation). Growth-oriented investors would now be almost 20 per cent wealthier. Surprisingly, these higher-risk portfolios did not suffer more severe setbacks during major risk-off events, such as the 2020 pandemic and the subsequent 2022 inflation surge. Historical simulations indicate similar approximate 7 per cent falls for both portfolios in 2022, with growth portfolios recovering faster from the pandemic-induced drawdown.
This recent performance might tempt conservative investors to increase their exposure to risk assets. However, experts caution against drawing broad conclusions from a mere ten-year window, as such periods are insufficient for full market cycle benchmarking. A longer historical perspective offers a different narrative. Between 2001 and 2016, encompassing the Global Financial Crisis, balanced portfolios demonstrated superior resilience, experiencing roughly 30 per cent smaller falls and recovering almost 12 months quicker during the 2008 drawdown. Over this 15-year span, the balanced portfolio even marginally outperformed in wealth gains.
This historical contrast underscores the importance of not over-relying on recent performance or singular market regimes for portfolio design. Diversification remains paramount; both bonds and equities deserve core holdings within a balanced portfolio to shield against unforeseen risk-off events. Alternative assets also play a critical role in managing volatility. Australia’s Future Fund, for instance, allocates about 15 per cent to a diverse array of hedge funds, aiming to reduce overall portfolio fluctuations. While hedge funds carry costs, their potential to achieve low correlation to traditional assets can significantly enhance compounded returns over the long term, preventing the erosion of wealth from high portfolio volatility.
