Balance and Ballast: A Strategy for Uncertain Markets

Equity Insights offers research and perspectives from Putnam’s equity team on market trends and opportunities.

Financial markets have changed dramatically since balanced portfolios were introduced to investors decades ago. As markets evolve and grow more complex, active management plays a greater role in the success of these strategies, which offer a mix of 60% equities and 40% fixed income. For many investors, this time-tested approach to asset allocation continues to be a solid offering. We believe investors can benefit from tenured portfolio managers who conduct rigorous research, continuously monitor a portfolio’s holdings and risk characteristics, and adjust its positioning for changing market environments.

The benefits of diversifying across asset classes

A portfolio that includes a mix of stocks and bonds is designed to manage volatility while delivering current income and consistent returns over time. Typically, there is relatively low correlation in equity and fixed income performance, so a combination of both can help dampen the impact of weakness in either asset class. The bond portion of the portfolio, which provides income potential, also serves as the ballast — aiming to bring a measure of stability and downside protection, particularly when equity markets are turbulent.

Last year’s challenges in perspective

In 2022, balanced portfolios encountered challenging conditions, as equity and fixed income markets largely moved downward in tandem. Based on historical returns, the 2022 declines in both equities and fixed income appear to have been an anomaly. In the 47 years of available data for the Bloomberg U.S. Aggregate Bond Index, 2022 was the only instance in which both asset classes had an annual decline. In all other years, the returns of one asset class helped soften the impact of a decline in the other.

This is the case this year, as bonds are down while stocks have rebounded, and balanced fund returns have benefited from the equity market rally. And although the spike in bond yields in 2023 has been a headwind for fixed income markets, going forward, those higher yields can provide higher levels of income for investors in balanced portfolios.

History shows the advantage of a balanced approach