How To Build A Balanced Portfolio For Today’s Market

March 03, 2017

The markets have changed a lot since the financial crisis and the global wave of monetary easing that followed. In the wake, advisors everywhere have found that building balanced portfolios isn’t so easy anymore, as traditional models such as 60/40 fall short of investor needs. Martin Small, head of BlackRock’s iShares, talks about the challenging environment, and tells us how to build a solid portfolio with a keen eye on that tricky fixed-income allocation. Is the challenge of building a balanced portfolio any different today than it was before we had, say, 1,900 ETFs to choose from? Is building a portfolio more difficult today?

Martin Small: There's never been more choice in the ability to blend broad-market core ETFs at extremely attractive value with precision exposures like preferred stock ETFs or currency-hedged Japan ETFs. There’s a vast array of tools that advisors and self-directed investors can use today to build any portfolio with any risk/return characteristics they want.

That said, there have been, over the better part of the last decade, permanent alternations in the contours of global equity and global fixed-income markets that have made portfolio construction harder than it used to be.

The traditional 60/40 portfolio, which has always been a good starting place, is expected today on most capital markets' assumptions to return somewhere between 2-3%, to a high of 4-5%. That's dramatically different from the environment that my parents grew up in, where they were able to use a traditional 60/40 balanced portfolio not only as a starting place but as a great way to grow wealth for the long term.

What's really changed—and what poses some of the larger portfolio construction challenges—is a decade of monetary policy that’s been unusual and particularly aggressive, and has distorted the fixed-income landscape. And fixed income is where advisors are having the greatest challenges. They've forgotten why they own fixed income.

We’ve pushed global yields so low as a result of aggressive monetary policy that people forget that they own fixed income not just for income, but for safety and diversification—safety as in surety of principal, something that is money good; diversification, bond ballast for your equities, as something that’s supposed to zig when the S&P 500 zags. And, finally, income.

Most advisors have inverted that pyramid. Safety should be the biggest part of your fixed income, followed by diversification, followed by income. Most people, as a result of an extremely low-yield environment, have emphasized income over diversification and safety. That permanently altered the landscape for how people are building portfolios.


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