The extraordinary market volatility and poor equity returns of recent years — as well as fears about the macroeconomic outlook — have prompted many investors to contemplate de-risking their overall portfolios. Perhaps they should — but first, they should contemplate the return side of the equation.
De-risking almost always means putting a much larger share of an asset allocation in bonds. Historically low yields make bonds unusually unattractive at this time. At 1.9 percent, our current median projected return for global seven-year sovereign bonds is worse than 90 percent of the returns in our normal range of return projections. That is, we’d seldom expect to see bond yields this bad.
Wide credit spreads do make corporate bonds more attractive, but that only helps so much. As the display below shows, we project that the median 10-year compound return on a diversified global bond portfolio, with 60 percent invested in investment-grade corporates and 40 percent in sovereigns, is likely to be only 2.8 percent, less than half our normal forecast of 6.3 percent.
Indeed, expected bond returns are so poor that investors who want the return normally expected of bonds alone would probably need to allocate 60 percent to equities. As for investors aiming for the returns normally expected of a traditional 60/40 asset allocation, they’d probably need a 100 percent equity allocation (not a prudent choice, in my view).
De-risking may make sense for retirees who have more than enough saved to cover their financial needs for the rest of their life, or for pension funds that are fully funded. But for those investors who need to grow their portfolios to cover their obligations, we think a more flexible approach is more likely to help them meet their goals: maintaining a significant allocation to equities, but adjusting the allocation dynamically in response to changing expected returns and risk. They can always de-risk their strategic allocation later, when market returns improve their funded ratio.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer of Asset Allocation and Bernstein Global Wealth Management at AllianceBernstein.
