This 'Safe' Portfolio Is Taking a Beating

"When's the bleeding going to stop?" my aunt asked me over the weekend.

She's in her 70s and generally doesn't keep up with the markets. She's also conservatively invested – her money is with Vanguard, not Robinhood. And I don't think she owns any individual stocks.

"This is the worst since 2008," she continued. "Everything I own is losing money!"

She's right. That's because 2022 has been uniquely painful... even for the most balanced investors. My aunt owns more bonds than stock-based investments. But even that hasn't sheltered her.

In fact, the first half of 2022 was worse than almost any other full year for a balanced portfolio. There's good news, though... History shows massive outperformance in the two years after one like this.

Let me explain...

When building a portfolio, most folks don't think about what stocks to buy. They focus on the overall "portfolio mix." On a basic level, that's how much of your portfolio you're putting in stocks and how much you're putting in bonds.

It rarely makes sense to only own stocks. Bonds tend to go up when stock prices fall. So even a small amount of bonds can lower your risk without hurting your returns much.

A typical balanced portfolio is about a 60/40 mix, with 60% in stocks and 40% in bonds. But this long-revered model has been a loser this year...

Bonds have been falling right alongside stocks. The benchmark U.S. corporate bond index was down 14% in the first half of 2022. If the year ended now, that would be the worst annual return in history, with data going back nearly 50 years.

As a result, the "traditional" 60/40 portfolio is having its worst year since 2008 so far. Take a look...

We're only halfway through 2022. Yet this balanced portfolio is already down 18%. That's an excruciating decline for a portfolio with historically low volatility.

Heck, this is its third-worst year since 1973... And things could get worse before year-end.

So what happens next?

As always, losses set us up for future returns.

Specifically, this portfolio tends to soar in the two years after a major losing year. The table below shows it...

These are the only three years where the 60/40 portfolio has staged double-digit losses. But on average, it was up 37.4% over the following two years. That's more than double the 18.4% two-year gain we've seen in this portfolio over the last five decades.

This doesn't give my aunt a specific answer. It doesn't tell us when the bleeding will stop. However, it does tell us that these bad times will pave the way for strong returns.

Stocks and bonds are crashing in unison. It has been miserable. But it won't last forever. It never does.

For now, focus on survival. The pain will end... likely sometime soon. And big gains will follow. Be ready to take advantage of it.

Good investing,

Brett Eversole

Further Reading

"Extreme fear doesn't last forever," Brett writes. Despite falling stock and bond prices and a looming recession, we're still seeing ways to capitalize on growth during challenging market conditions... Read more here: What I Learned From 'Ringing the Bell' in New York.

Investors are hiding their money on the sidelines today as volatility runs rampant. But staying on the sidelines too long could mean missing out on major gains once the trend returns... Get the full story here.