Why Diversify Beyond Stocks and Bonds?

Learn how diversifying beyond traditional stocks and bonds has historically optimized long-run portfolio performance.

Asset allocation is a key determinant in driving overall portfolio performance. Stock market investments that were left alone during the 2008 financial crisis recovered by the end of 2012. Diversified portfolios that were rebalanced during market downturns recovered faster.

[1] Following the 2008 recession, a 60/40 portfolio that was rebalanced annually recovered in less than 15 months, roughly 4 months sooner than the passive 60/40 portfolio without rebalancing. [2] The rebalancing 60/40 portfolio continued to outperform the passive portfolio during periods of recovery. Our example 60/40 model portfolio rebalanced annually on January 1st, and is composed of 60% Morningstar Core U.S Equity Index and 40% Bloomberg Barclays 7-10yr Treasury Index.

We believe asset allocation across traditional stocks and bonds is no longer enough to ensure optimal performance. The right defensive diversifier strategy provides:

  • Greater exposure to non-market factors that help lower overall portfolio volatility
  • Improved drawdown performance to turn a market downturn into an opportunity
  • Low correlation with traditional investment strategies and the ability to capture market appreciation

[3] Directly following the 2008 recession, a 50/30/20 portfolio with diversifiers that was rebalanced annually recovered in 12 months – nearly 7 months sooner than the passive 60/40 portfolio. By 2010, the 50/30/20 portfolio had significantly outperformed the rebalancing 60/40 portfolio. [4] After nearly a decade long bull run for U.S. stocks, the 50/30/20 portfolio captured most of the market appreciation, and was only slightly behind the rebalancing 60/40 portfolio. Our example 50/30/20 model rebalances annually on January 1st, and is composed of 50% Morningstar Core U.S Equity Index, 40% Bloomberg Barclays 7-10yr Treasury Index, and 20% CP High Yield Trend Index.

 

The material provided herein has been provided by Counterpoint Mutual Funds, LLC and is for informational purposes only. Counterpoint Mutual Funds, LLC serves as investment adviser to one or more funds distributed through Northern Lights Distributors, LLC member FINRA/SIPC. Northern Lights Distributors, LLC and Counterpoint Mutual Funds, LLC are not affiliated entities.

Potential Ways to Avoid Investment Declines in Retirement

The right diversifier has historically improved portfolio drawdown performance, especially in challenging markets.

One benefit of a tactical high yield fixed income diversifier is that it functions as a distinct asset class from traditional fixed income. This trait gives investment advisors an additional tool to reduce portfolio drawdown risk.

[5] During the 2008 financial crisis, a 50/30/20 portfolio with diversifiers that was rebalanced annually displayed much better drawdown characteristics, recovering 6 months sooner than the 60/40 portfolio with rebalancing. [6] After a long bull run for U.S. stocks the 50/30/20 portfolio is only 4.3% behind the traditional 60/40 portfolio. Our example 60/40 and 50/30/20 models are rebalanced annually on January 1st, and are composed of Morningstar Core U.S Equity Index, Bloomberg Barclays 7-10yr Treasury Index, and CP High Yield Trend Index.

In addition to reducing portfolio declines, the right tactical high-yield income diversifier reduced the risk of ruin, especially for clients making regular withdrawals during retirement.

[7] Given an inflation adjusted (2%/year) $40K lump-sum withdrawal (4% of $1 million) distributed annually, a 50/30/20 portfolio significantly outperforms both traditional 60/40 and 100% stock portfolios both in drawdown during the 2008 financial crisis and in recovery. [8] On 12/31/2019, after a long bull run for U.S. stocks the 50/30/20 is up 71%, only 0.6% behind the 60/40 portfolio. Our example 60/40, 50/30/20 and 100% stock models are rebalanced annually on January 1st, and are composed of Morningstar Core U.S Equity Index, Bloomberg Barclays 7-10yr Treasury Index, and CP High Yield Trend Index.

Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.

The material provided herein has been provided by Counterpoint Mutual Funds, LLC and is for informational purposes only. Counterpoint Mutual Funds, LLC serves as investment adviser to one or more funds distributed through Northern Lights Distributors, LLC member FINRA/SIPC. Northern Lights Distributors, LLC and Counterpoint Mutual Funds, LLC are not affiliated entities

Other Insights

When Tactical High Yield can Potentially Boost Fixed Income Performance

See how investors have used trend following strategies in high yield credit to improve traditional buy-and-hold portfolios.

Portfolio Analyzer: Matching Asset Mix to Your Risk Preference

Explore how tactical high yield strategies have improved portfolio performance and Sharpe ratio based on an investor’s risk preference.

Ready to learn how CP ETFs can potentionally improve portfolio performance?