Financial Advisors: Beware the ‘2-Year Itch’

Returns of asset allocation benchmarks, and the most prominent stock and bond market indexes, have been somewhere between disappointing and dreadful for the two years ending in June.  

While the investment advisory industry goes to great lengths to promote the concept of “long-term investing,” human nature in the era of instant-gratification communication may not be as keen to embrace that notion as it has in the past.  

That presents a potential challenge, not only to advisors, but to self-directed investors who have made the choice to coach themselves in an environment that is increasingly complex to navigate. That’s where exchange-traded fund investing can be a helpful, by expanding the tool set for advisors and investors exponentially compared to the standard 60/40 portfolio mantras. 

The tale of the tape looks like this: From June 30, 2021 through June 27, 2023, a set of allocation ETFs from iShares produced total returns as follows, rounded to the nearest full percentage point:  

•  iShares Core Conservative Allocation ETF (AOK): -8% 
•  iShares Core Moderate Allocation ETF (AOM): -7% 
•  iShares Core Growth Allocation ETF (AOR): -5%  
•  iShares Core Aggressive Allocation ETF (AOA): -3% 

That’s the result of perhaps the worst combined performance for stocks and bonds in a calendar year in modern history, in 2022. Some investors could rationalize losing money and paying advisory fees as the inevitable ups and downs of being in the public markets. But with all of the stimuli and inevitable distractions that make up modern digitally enhanced life, investment evaluation horizons are likely shrinking.  

ETFs to the Rescue?  

That depends on the degree to which advisors and investors embrace the ability of ETFs to turn traditional allocation approaches on their head, but breaking the global markets into an ever-expanding number of subsegments.  

For instance, ETFs are available in categories that hedge stock or bond market risk or tactically allocate between different asset classes based on market conditions. Others can isolate a single spot on the Treasury yield curve or extend into areas of the bond market not covered by traditional allocation strategies.  

Instead of investing in a basket of commodities for diversification, many ETFs target specific commodities or groups of them. And, when it comes to picking one’s spots in the equity market, from dividend-focused approaches to aggressive growth industries, there’s something for nearly any end-point of an investor’s research. 

For investment advisors who may be concerned that some clients are getting the “two-year itch” from not seeing positive returns in the traditional stock/bond mix, consider diversifying your approach to ETFs—it may be the most timely practice management idea of the year.