Know the Strike Zone and Keep Swinging!

Key Points

  • Although diversifying asset classes underperformed relative to core assets in the last decade and provided only moderate relief in 2022 when core assets underperformed, it’s unwise to abandon them.

  • Asset allocation into diversifying assets is a straightforward and powerful way to manage macro exposures. Understanding those exposures defines a strike zone and explains recent results.

  • Introducing a simple three asset portfolio of TIPS, REITS, and commodities into a core 60/40 portfolio is an effective way to manage major macro exposures and reduce the overabundance of equity volatility in a standalone core portfolio.

As the calendar closed on 2023, investors were once again treated to magnificent returns in their stock and bond portfolio. Global stocks as represented by the MSCI All Country World Index (ACWI) returned 22.8% while global bonds (Bloomberg Global Aggregate Index) also ended the year in the black, with a return of 5.7%. Put those together, and a Global 60/40 portfolio provided strong 16.5% returns in 2023 to cap off a 6.3% annualized return over the last decade. Investors focused exclusively on the U.S. corollary of the 60/40 portfolio did even better, returning 17.7% in 2023 and 8.1% annualized over the trailing decade.