Prepare your portfolio for potential volatility with long-term asset allocation

For investors with a longer time horizon, the ability to absorb risk and short-term volatility becomes much greater. Over historical rolling 20-year time frames, U.S. and Canadian equity markets have not experienced negative rates of return. But over any calendar year, negative returns happen about 25% of the time. This means having a framework for investing that removes emotions from the equation needs to be just as much a part of the investing process as knowing what tools are available.

Our recommendation for long-term strategic asset allocation starts with writing down your investment policy statement, which should capture one’s investment beliefs based on research, and articulate an asset mix that focuses on long-term results to achieve the ultimate desired outcomes. This can allow one to refer to their rational side during difficult patches in the market. Or better yet, speak with an advisor who can help you take a deep dive into your asset allocation. An advisor can help you understand what each asset class is designed to do, set target ranges for how much exposure is needed to get to your goals, evaluate asset classes compared to your risk tolerance and guide the construction of your portfolio.

A 60-40 portfolio is one that holds 60% in equities and 40% in fixed income investments. Though past performance isn’t always indicative of future performance, a portfolio comprised of 60% global equities and 40% Canadian bonds, over the past 20 years to the end of 2023, would’ve compounded at a 6.8% rate of return. If you had dutifully saved $10,000 a year over that 20-year time frame, your $200,000 investment would’ve turned into $459,000.

Especially in the short term, market volatility is always present. This creates a challenge to disciplined investing by individual investors, especially those who don’t have a defined process for investment decisions. Concerned by a short-term drop in the value of a particular investment, some investors may be tempted to sell even if its fundamentals are still strong.

Investing with a 60-40 portfolio increases the odds that an investor can stay disciplined. Not only is volatility reduced versus a 100% equity portfolio and returns increased versus a 100% fixed income portfolio, but investors actually get more return per unit of risk simply by combining the two asset classes. That’s the power of diversification. Over the last 20 years, the return per unit of risk for a 60-40 portfolio is 0.88 units of return per unit of standard deviation, versus 0.73 for global equities.

To learn more, read the 2024 edition of the long-term strategic asset allocation report (PDF, 745 KB) Opens in a new window..

CIBC Asset Management is committed to providing market and investment insights. We want to help you find the right solutions to guide your investment journey. If you have questions about the asset allocation in your investment portfolio, get in touch with your CIBC advisor or representative at any time.