As a parent, I'm delighted by my daughters' enthusiasm for the Christmas season and find myself making an extra effort to embrace this special time of year. That means taking the time to enjoy the beautifully decorated neighborhoods—not to mention the joy of giving. It also means embracing this hopeful time of year as an opportunity to reflect on the year that has (nearly) passed and thoughtfully consider the time to come.
For many investors, the reflection will be frustrating, given that most asset classes and portfolios have experienced meaningful declines. The sell-off in stocks and bonds may be an opportunity to harvest losses and rebalance portfolios in alignment with investor objectives.
Meanwhile, many complementary asset classes have fared well throughout the year, including private investments in real estate, infrastructure, and debt. These asset classes have generated positive returns year-to-date and served as valuable ballasts to portfolios dealing with the effects of persistent inflation and rising interest rates.
In particular, hard assets—such as real estate and infrastructure—have attracted attention for their ability to endure inflation as the cost to replace these assets rise. As for private debt, investors have seen an opportunity to benefit from rising interest rates, given the floating rate structure of private debt. In both cases, the suggested benefits of the asset classes have thus far proven true.
Turning our perspective to the road ahead, the silver lining of the turmoil in stocks and bonds is that the latest return expectations for these assets have improved significantly. If capital market assumptions prove accurate, long-term investors have reason to be optimistic about the growth of their portfolio over the next ten and fifteen years.
However, the improved return expectations for the traditional 60/40 portfolio invites a question about the role of complementary investments in portfolios moving forward. Will they continue to provide a benefit?
Our take is complementary strategies remain an important consideration for a well-diversified portfolio. The return expectations for complementary asset classes have also improved, though to a lesser extent than for stocks and bonds.
Aside from their specific return forecasts, complements offer other potential benefits that should be considered alongside their unique risks when constructing a portfolio, including:
- Diversification—Complementary strategies represent a diverse set of investment opportunities generally not represented in a portfolio of stocks and bonds.
- Different risk-return profiles—A stock-bond portfolio has distinct sources of risk, segregated between the higher-risk, higher-return expectations of stocks and the lower-risk, lower-return forecasts of bonds. Many complementary strategies feature moderate-risk, moderate-return profiles that bridge the gap between stocks and bonds.
- Volatility abatement—The addition of strategies with differentiated return drivers is expected to reduce portfolio volatility.
Tying it up in a bow
So, the year-end summary for complements reflects investments that have served their purpose well during the year, though evaluating their portfolio role moving forward is warranted. Despite the improved outlook for stocks and bonds, complements are expected to remain attractive investments and important contributors to meeting portfolio goals.
Meanwhile, our family’s countdown calendar continues its march to zero. During this finale of the year, my excitement is not based on investment forecasts but the time with family and hope for a wonderful year ahead. Wishing you all a joyful holiday season!