Investment Commentary

Football, Food, and Forecasts

By Jonathan Henshue | Johnson Financial Group • December 01, 2021

3 minute read time

Welcome back to the investment landscape after what I hope was a relaxing Thanksgiving! I was fortunate to spend time with family, watch football, and enjoy more good food than necessary. These are all family rituals I enthusiastically look forward to each year.

The investment world has its own end-of-year rituals, including the release of the latest return expectations across asset classes. While no two sets of forecasts are the same, the bad news for investors is the broad agreement is that the strong returns of recent years suggest muted future returns for both stocks and bonds.

Unfortunately, the expectation for lower returns does not mean there's an expectation for lower volatility. This means that investors should expect lower portfolio returns for the same level of risk or consider other investment tools which may help mitigate portfolio risk.

We firmly believe in prudently reducing portfolio risk, and that complementary asset classes and strategies can serve this purpose. Therefore, when considering portfolio construction, we incorporate third-party return expectations and use financial tools to examine risk-return trade-offs of various allocations. To demonstrate, consider the results below from a traditional portfolio optimization:

 

the graph compares the simulated portfolio outcomes of the two portfolios based on their respective levels of risk and return and assuming a starting value of $1.5M. The simulation also assumes annual withdrawals of $60,000, based upon the classic 4% retirement rule

The table compares a traditional 60/40 portfolio of stocks and bonds to one with a 17% allocation to complements, including real estate, real assets, and private debt.  The results show that the additional diversification from complements produces the same level of expected return while reducing the expected risk (standard deviation).

Diversification and risk reduction are so commonly used in finance that the terms can lose their meaning. To highlight their importance, the image below compares the simulated portfolio outcomes of the two portfolios based on their respective levels of risk and return and assuming a starting value of $1.5 million. The simulation also assumes annual withdrawals of $60,000, based upon the classic 4% retirement rule.

The table compares a portfolio of stocks and bonds to one with a 17% allocation to complements, matching the current recommended weight in JFG models. The additional diversification from complements produces the same level of expected return while reducing the expected risk (standard deviation).

By reducing risk, the allocation to complements narrows the range of outcomes. Considering most investors would prefer to improve the worst scenarios instead of emphasizing improvement of the best, the benefit of incorporating complementary strategies is clear.

As always, we encourage you to discuss the benefits and unique risks of complementary investments with your Johnson Financial Group advisor. Although the needs of each client and portfolio is unique, complementary investments can be like sweet potatoes and stuffing; they aren't the main course, but a Thanksgiving meal or investment portfolio just might be better when included.

ABOUT THE AUTHOR

Jonathan Henshue

Jonathan Henshue

AVP, Wealth Investment Analyst | Johnson Financial Group

In his role as an Investment Analyst, Jon is responsible for conducting due diligence and selecting third party investment managers for use across the Johnson Financial Group platform. Jon’s areas of coverage include US growth equity managers and complementary investments.

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This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE