A couple of B words explain what will work for investors next year.
Boring, yes. But also balanced. After a thrashing in 2022, balanced investing is back and likely to perform well in 2024.
You were hoping for something more edgy, clever or insidery? Investors will no doubt ride one or more fresh trends to big profits in 2024, as they do every year. But so few of these investors will actually keep their gains. The trick of trend-chasing is to exit before the inevitable downturn.
Not so with the classic portfolio of 60 per cent stocks and 40 per cent bonds (or variations thereof). The path to success with a balanced portfolio is to just hang on through good years and bad.
For an example of a bad year, your attention is drawn to 2022. The entire point of a 60-40 portfolio is to balance the risk of investing in stocks with exposure to bonds. In 2022, stocks fell sharply and bonds were worse. Think of buying a reliable type of car or SUV and having it break down on the highway.
If you had a 60-40 balanced portfolio, you could easily have endured a double-digit loss in 2022. There was talk of the death of the 60-40 portfolio, as if we were in a new paradigm where a modest tilt to stocks with the rest of your money in bonds was like pressing a portfolio self-destruct button.
New paradigms in investing are rare, though. The shift of money into low-cost exchange-traded funds certainly qualifies, while the death of diversification through a mix of stocks and bonds does not. In fact, people who held their 60-40 balanced portfolios through the past five years should have made a typical 5 to 6 per cent.
In no way is a 60-40 mix right for all investors. Gen Zs could easily go with a 90-10 or 80-20 mix. Retirees who need to keep growing their investments, expect to live a long time and don’t stress when stocks plunge could go 70-30. But as a default portfolio mix that does the most good for the most people, 60-40 is effective. And, in 2024, it could very well be an ideal mix.
Considering how much concern there is about an economic slowdown, stocks have had a pretty great year in 2023. The optimism driving stocks higher in recent weeks could easily spill into 2024 if the global economy avoids a significant downturn.
But let’s say something happens in the economy or politically that causes stocks to reverse course in 2024. With a 40-per-cent weighting in bonds, you have a hedge against a stock market plunge.
Bonds failed in this mission in 2022 because interest rates were rising sharply. Whatever direction rates go, the price of bonds and bond funds does the opposite. So it was that the benchmark FTSE Canada Universe Bond Index lost 11.7 per cent in 2022, while the S&P/TSX composite index lost 5.8 per cent.
Twelve months ago, there was a lot of anticipation that inflation would ease in 2023 and interest rates would decline. This mistimed forecast is highlighted as a reminder of how all economic outlooks today must carry a warning in bold that events may not play out as expected.
Even so, it looks like 2024 will be a year of falling rates. Inflation most recently clocked in at 3.1 per cent, down from 5.9 per cent in January. The Bank of Canada will start lowering its trend-setting overnight rate as soon as it feels confident price increases are closing in on 2 per cent. That could happen as early as the first half of next year.
Bonds have benefited from a lower-rate outlook to the extent that the Canada Universe Bond Index was up 6.6 per cent for the year through mid-December. Expect more substantial gains if the Bank of Canada starts reversing the rate hikes of the past two years.
A 60-40 mix seems a good way to match the potential risks and rewards of stocks with a cushion of bonds in 2024, but feel free to adjust as required. The point is the balanced approach. It’s boring, and it’s back.
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Rob Carrick