For Canadian investors, one of the big surprises of 2022 has been how poorly many balanced mutual funds, exchange-traded funds (ETFs) and portfolios have performed. Investors following the traditional pension-style allocation—roughly 60% stocks and 40% bonds—have found themselves facing losses in both components at the same time. In ordinary market environments, bonds usually offer modest returns that help cushion equity losses during downturns. This year, however, that cushioning effect largely failed to materialize.
These are not normal times.
Take, for example, VBAL, the Vanguard Balanced ETF Portfolio that I hold across several accounts. As of early October it was down about 15% year-to-date. That experience is not unique to Vanguard: comparable asset-allocation ETFs from BMO, iShares and other providers showed similarly weak results.
Questioning the 60/40 portfolio for retirees
Andrew Hallam, author of Millionaire Teacher, wrote recently for the Globe and Mail that younger ETF investors should welcome the opportunity to buy equities at lower prices. He acknowledged, however, that those closer to or in retirement need a more cautious approach. Meanwhile, MoneySense’s Dale Roberts and other commentators have explored augmented balanced portfolios that go beyond the stock-and-bond mix by adding asset classes such as REITs, commodities, precious metals and even cryptocurrencies through specialized ETFs. Those additions can complement a core asset-allocation ETF and broaden diversification.
Roberts has also questioned whether the traditional balanced portfolio is obsolete. Drawing on U.S. commentary—such as coverage in U.S. News and Ben Carlson’s “A Eulogy for the 60/40 Portfolio”—he noted that observers have repeatedly proclaimed the 60/40 mix “dead” in recent years because of low interest rates and central-bank policy. Much of that analysis is based on a simple U.S. mix of the S&P 500 and 10-year U.S. Treasuries, which doesn’t directly reflect the holdings of a typical Canadian investor.
In Canada, many investors—and robo-advisors like NestWealth—use a broader set of holdings that include U.S., international and Canadian equity ETFs; a range of government, corporate and real-return bonds; real estate exposure; and cash. Some Canadians also add alternative or niche holdings such as private equity or crypto. As Roberts concluded, a thoughtfully constructed balanced portfolio is not necessarily dead; its form and components may simply be evolving.
Franklin Templeton’s take
Franklin Templeton noted this summer that many countries experienced declines in both equities and fixed income, producing one of the worst showings for balanced portfolios in three decades. The firm pointed out that fixed-income returns have been particularly poor—this has been one of the worst starts to the year for bonds in about 40 years, driven by rising inflation and higher interest rates. By mid-October the S&P/TSX Composite Index was around minus 10% year-to-date, while the FTSE Canada Universe Bond Index had fallen roughly 15%.
Given the risk of recession and elevated volatility, Franklin Templeton said it was trimming equity exposure slightly below neutral and reducing regional exposure to areas it views as more vulnerable, while remaining modestly overweight in markets it sees as benefiting from higher resource prices. On fixed income, the firm noted the unusual return dynamics—bonds could experience further pain if yields rise, but could also rebound if rates retreat—so it has added bonds only marginally and is holding more cash than typical to dampen volatility.
Vanguard changes the guard
Vanguard published a reassuring paper in July titled “Like the phoenix, the 60/40 portfolio will rise again.” The paper emphasizes historical perspective: simultaneous monthly declines in stocks and bonds are not unheard of. Looking at monthly data since the mid-1970s, Vanguard highlights that both asset classes have been negative in the same month about 15% of the time, but prolonged multi-year joint losses are historically rare. Vanguard reminds investors that the 60/40 portfolio is designed to deliver long-term average returns—about 7% going forward according to Vanguard’s Capital Markets Model—rather than positive returns every single year. For context, Vanguard notes the annualized return for a 60% U.S. stock/40% U.S. bond portfolio from Jan. 1, 1926 through Dec. 31, 2021 was 8.8%.
Vanguard also points out that the same long-term principles apply to funds with different stock/bond mixes. Its product lineup includes funds and ETFs ranging from equity-only allocations to ones with as little as 20% equities and the balance in bonds.
What does this mean for you?
How have investors and advisors reacted to a year in which both major asset classes have lost ground? During long bull markets, DIY investors benefit from steady gains and lower fees, but in turbulent years many people find value in professional guidance. Financial advisors can help adapt allocations, manage withdrawals, and introduce alternative income sources that reduce reliance on traditional bonds.
Matthew Ardrey, a wealth advisor with Toronto-based TriDelta Financial, says most clients have handled 2022 fairly well because their portfolios were positioned to hold value better than broad market indices. Yet he also notes real anxiety among retirees: rising costs and shrinking portfolios have been painful, and fixed income—once a source of stability—offered little protection this year. That’s where comprehensive financial planning and active portfolio management matter.
Ardrey has been sceptical that a plain 60/40 split is always the best choice for retirees. After rapid bond gains in 2020 following rate cuts, he anticipated that normalizing rates would later pressure bond returns. With inflation accelerating in 2022, TriDelta shortened many clients’ bond durations to reduce sensitivity to rising yields; shorter-term bonds have generally suffered smaller losses than long-term bond funds. For example, some shorter-term bond ETFs or funds declined less than broad long-term bond indices year-to-date.
TriDelta also favors dividend-growth strategies and alternative investments to generate income. Its conservative dividend-growth sleeve fell less than broader equity indexes this year, and the strategy currently produces a meaningful yield that helps offset market declines. The firm supplements income with private-credit and private real-estate exposure, particularly residential REITs, as an additional source of portfolio cash flow.
My view is that core allocations—such as 60/40 or 50/50—will likely remain the foundation for many long-term investors, while additional, more specialized holdings can be layered on to address specific risks and income needs. As interest rates rise, investors may consider building GIC ladders for the fixed-income portion and using dollar-cost averaging to gradually increase positions in high-quality dividend-paying stocks if valuations stay depressed.
Jonathan Chevreau is the Investing Editor at Large for MoneySense. He is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].
Read more Retired Money:
- How might inflation impact your retirement plans?
- Tontines in Canada: Moving from theory to practice as a solution to our retirement crisis
- Delaying CPP and OAS to age 70: Is it worth the wait?
- Is now the time for retirees to sell stocks and buy GICs?