Chatting recently with an advisor about an upcoming client meeting. The client’s current portfolio is ~50% TD’s plus the rest in equities, so the “classic” 2-asset portfolio. Given that cash has been one of the better places to be, the overall portfolio return over the past 18 months has been slightly positive.

Contrast that experience to the traditional 60/40 portfolio for a US investor, which had its worst return experience in decades, which you can see in the below graph.

Now, I’m mixing the US 60/40 experience with an Australian two asset class portfolio, that doesn’t matter really, we’ve got our own SAA/DAA portfolios which are better diversified and have performed well, vastly better than the above.

But for the client meeting, rather than just sticking a fund factsheet under their nose and handwaving away concerns by pointing to our good track record, the goal is more about trying to get the impression across that a positive return over 2022 was a solid outcome, and that every now and again you do get negative returns. There are four negative bars in the graph above, two of them significant, and quite a few tiny positive ones in which the total return was well below average.

Those negative return outcomes are precisely what give rise to the positive return premia. No risk, no return, no pain, no gain, no pain, no premia. It is precisely because sticking with a strategy is hard to do, that we can collect gains from investing in the first place.

If it was easy to do, and everyone could stick with it, there’d be nothing above the risk-free rate for any of us.

The below graph gets at the same point, drawdowns are consistent features, not bugs. The pink bars show the intra-year drawdowns, the blue shows the calendar year drawdown. On average, each year every year, the intra year fall is at least 8-10%, even as the market goes on new highs.

Same again for Australia, to make it more local.

And so the trick is to control your emotions and rather than fretting about what the next year looks like, taking the long run view, letting the standard asset allocation principles work their magic (assuming the client is in the right risk profile, based on willingness and ability to tolerate risk in pursuit of their investment objectives) is, as always, the best you can do. It’s not about lowering expectations, per se, but rather setting appropriate ones, or at least one’s that everyone can share.

Unless you can tell the future.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

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