We are all very well aware that the new normal of increased volatility and low interest rates forces us to reconsider our investment strategies. Indeed, John Maxfield of the Motley Fool points out that the bond market has substantially changed with the number of "safe assets" dropping significantly.
We have seen large numbers of companies and even countries having their investment rating reduced. The result of that is a scramble for those safe assets - not just for investors, but for large corporations who park substantial amounts of money in these instruments for a short period of time.
The question is how does one respond to this. Some move to gold or other precious metals, others have shifted their risk profile to move towards the safest of blue chip stocks that also provide dividends as a type of synthetic safe asset.
I am going to make a comparison of some of these assets to see if historical performance tells us anything:
- Procter and Gamble (PG) has survived wars, financial crises and keeps on going with a war chest of strong worldwide brands
- McDonald's (MCD) has had a remarkable run of consistent growth and increasing dividends
- Vanguard Total Bond Market ETF (BND) gives us a safe assets reference point
- The SPDR gold shares SPDR Gold Trust ETF (GLD) gives us the precious metals reference point
- Lastly, we have our reference dividend ETF portfolio with a buy and hold strategy
Portfolio Performance Comparison
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Strategic Asset Allocation Moderate||4%||-2%||-8%||14%||109%||2%||7%|
This table clearly shows the security of the bond market in terms of risk adjusted returns. Even though McDonald's has produced strong returns, when they are adjusted for risk, BND beats it even with significantly reduced returns. The challenge comes when you need to add some growth into the portfolio. What is the mix of risk and safe assets and which ones should you pick? The chart shows you the danger of shifting away from safe to risk based assets - unless you are fully aware of what you are doing.
PG is the blue line
PG is the blue line
I find that the graphical representation adds information to the table. This is what I take away from it:
1. The stability of the safe asset is clear - lower volatility and lower growth and an important balance for those with less risk tolerance.
2. PG has similar properties to the dividend bearing ETF portfolio, which makes sense as PG is a worldwide brand with significant diversification matching the ETF portfolio and with similar growth.
3. McDonald's is like PG, but simply has higher growth. I think that there is still significant potential for growth in emerging countries - which is an area of focus for them.
4. Gold continues to see strong growth, but has more volatility.
The conclusion I draw from this is that there may be a new synthetic "safe asset", which is a combination of some of the above to provide a boost to the growth, while sacrificing a little to risk. Looking at a combination of BND and MCD, or BND and PG might be an interesting path to consider.
Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.