How has the allocation of the various portfolios worked across the globe?
In the recent market turmoil, Worst Year in U.S. Treasury History, sustained inflation and the threat of slowing growth and recession looms. This is a particularly important issue. Given the current debate on the effectiveness of the traditional 60/40 portfolio,To answer this, we examine the performance of portfolios with 100% equity, 100% fixed income, 60/40, and 80/20 asset allocations in the US, UK, Italy, Switzerland, and global markets using lump sum and dollar-cost averaging. Act (DCA) basis.
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We chose these markets because they have wide availability of liquidity products to execute our strategy and they have varying levels of volatility.
All hypothetical portfolios are constructed in Exchange Traded Funds (ETFs), with the exception of allocations to global bonds. We collected ETF closing price data and global bond fund net asset values and reinvested/accumulated dividends over a 10-year holding period from 12/31/2012 to 12/31/2022. Funding in USD. The only Swiss Bond ETF with a 10-year return track record had target maturities ranging from 7 to 15 years.
Components of Portfolio Strategy
America | stock | SPDR S&P 500 ETF Trust (SPY) |
bonds | iShares US Treasuries (GOVT) | |
England | stock | iShares Core FTSE 100 UCITS ETF (ISF) |
bonds | iShares Core UK Gilts UCITS ETF (IGLT) | |
Italy | stock | Lyxor FTSE MIB UCITS ETF (MIB) |
bonds | iShares Italian Government Bond UCITS ETF (IITB) | |
Switzerland | stock | iShares SMI ETF (CSSMI) |
bonds | iShares Swiss Government Bond 7-15 ETF (CSBGC0) | |
global | stock | iShares: MSCI World (URTH) |
bonds | iShares Global Government Bond Index (LU) F2 USD |
We backtested and calculated the annual total return for each strategy based on 120,000 investments in local currency. Under the lump sum approach, we invested the full amount of 120,000 on December 31, 2012. The DCA approach splits the total monthly investment into local currency cash flows of 1,000 for 120 months from 12/31/2012 to 12/31/2022.
Transaction costs were excluded as they are likely to be small for the lump sum strategy and possibly high for the DCA method, but do not qualitatively affect the results.
Annual Return Performance: Lump Sum vs. DCA
The annualized returns for the lump sum approach for country and global portfolios visualized in the chart below show that only the 100% U.S. equity portfolio outperformed the 100% global equity portfolio. Beat their world opponents. Each 80/20 allocation produced higher returns than his 60/40 peer in the same market.
lump sum annualized return
![](https://i1.wp.com/blogs.cfainstitute.org/investor/files/2023/04/Lump-sum-chart.png?resize=640%2C235)
The US equity market initially performed relatively well compared to the other three countries, with all US portfolios performing well except for the 100% fixed income allocation. However, these results have a major caveat. These results depend on a precise 10-year time window and cannot be generalized from our sample. Furthermore, not all investors, whether individual or institutional, follow the lump sum approach during the accumulation phase. This is why we did his DCA analysis.
How did the DCA strategy perform in comparison? All four country markets show similar trends, as shown in the following chart. Only 100% US stocks beat his 100% global stocks. Similar to the bulk analysis, the 80/20 outperforms the 60/40 portfolio.
Annual return by dollar cost averaging
![](https://i2.wp.com/blogs.cfainstitute.org/investor/files/2023/04/dollar-cost-average-chart.png?resize=640%2C235)
Comparison of holding period
To isolate the impact of disastrous bond returns in 2022, we ended the holding period on December 31, 2021 instead of December 31, 2022 and reduced our investment from 120,000 to 108,000. This has resulted in an overall increase in fixed income and equity annual returns for the DCA approach. The 100% US Equity strategy improved the most, generating 6.56% higher returns.
So how did the lump sum strategy perform for both 100% equity and 100% bond allocation holding periods in each country? The following chart extracts the results.
Total: 100% Stock vs. 100% Bond Portfolio
![Chart showing ramp sum: 100% stock and 100% bond portfolios over two holding periods](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/04/Lumpsum-100-percent-Equity-vs-100-percent-Bond-Portfolios.png?resize=640%2C244)
For comparison, the visualization below shows how the 60/40 and 80/20 allocations for each market performed on both timeframes.
Equity and bond funds in each category, and all 60/40 and 80/20 portfolios, have significantly higher returns when the holding period ends on 31 December 2021 than on 31 December 2022 showed.
Total: 60/40 vs 80/20 Portfolio
![Chart showing ramp sum: 60/40 vs 80/20 portfolios on two time horizons](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/04/Lumpsum-60-40-vs-80-20-Portfolios.png?resize=640%2C235)
volatility
Using the average monthly returns, we calculated the standard deviation for each strategy and multiplied it by the square root of 12 to convert it to an annual rate. As shown in the table below, the standard deviation of funds in each category increased in 2022 as equity and bond market volatility increased globally.
standard deviation
Until 2021 | by 2022 | |
US stocks | 13.33% | 14.75% |
US Treasuries | 3.67% | 4.27% |
uk stocks | 12.14% | 12.21% |
British bonds | 6.80% | 7.92% |
italian stocks | 20.79% | 20.93% |
italian bonds | 5.81% | 6.39% |
swiss stocks | 11.90% | 12.37% |
swiss bonds | 4.88% | 5.73% |
global equities | 13.45% | 14.74% |
global bond | 5.09% | 5.96% |
Italian equities have the highest volatility, while the UK and Switzerland have the lowest, but U.S. equity volatility is closely correlated with global equities. The US and Swiss bond markets were the most stable.
sharpe ratio
To understand the risk-adjusted return of each strategy, we calculated the Sharpe ratio. For the risk-free rate, we use the average 10-year Treasury bond rate for each country and, since the global portfolio is denominated in USD, the average 10-year US Treasury rate. The results for the two time samples shown in the two subsequent charts show high/excellent Sharpe ratios for all periods to 2021, except for the Italian 80/20 portfolio. This shows that equity and bond markets performed better globally on a risk-adjusted basis in his 2021 than in 2022.
Over the two timeframes, the US and Swiss varieties have higher Sharpe ratios, while their UK and Italian peers have lower Sharpe ratios, compared to a 100% global equity allocation. All four countries’ 100% bond allocations exhibited higher Sharpe ratios than their global counterparts.
Sharpe ratio by 2021
100% equity | 100% bond | 60/40 | 80/20 | |
US portfolio | 1.06 | 0.03 | 1.11 | 1.08 |
uk portfolio | 0.13 | 0.31 | 0.25 | 0.18 |
Italian portfolio | 0.40 | 0.39 | 0.44 | 0.35 |
swiss portfolio | 0.89 | 0.23 | 0.94 | 0.72 |
global portfolio | 0.79 | -0.27 | 0.68 | 0.75 |
Sharpe ratio by 2022
100% equity | 100% bond | 60/40 | 80/20 | |
US portfolio | 0.73 | -0.36 | 0.65 | 0.70 |
uk portfolio | 0.12 | -0.11 | 0.01 | 0.10 |
Italian portfolio | 0.31 | -0.01 | 0.28 | 0.44 |
swiss portfolio | 0.65 | -0.08 | 0.59 | 0.46 |
global portfolio | 0.51 | -0.57 | 0.32 | 0.44 |
When the holding period ended in 2021, the 60/40 portfolio had a higher Sharpe ratio than the 80/20. At the end of 2022, all 80/20 portfolios had higher Sharpe ratios in Switzerland, with the exception. Assigning higher percentages, up to 20%, to bonds produced worse results.
The Sharpe ratio for global 80/20 portfolios was higher than 60/40 for both time samples, but especially for the sample ending in 2022. Oversized role in our results.
Future prospects
What are the takeaways from this analysis? First, the lump sum method worked well for all stock-allocated markets and portfolios. Of course, such methods require a lump sum to invest, and success is partially dependent on market timing. Additionally, investors may emotionally resist bulk investing during market downturns. The DCA approach, on the other hand, smooths the impact of market fluctuations on the portfolio and reduces timing risk.
Based on the lamp-sum Sharpe ratio, the 100% equity portfolio has the best risk-adjusted performance through 2022 in all markets except Italy. For the period ending 31 December 2021, the 60/40 allocation performed best on a country risk-adjusted basis, but not globally. The 80/20 allocation was better than the 100% equity and 100% bond allocations in some markets, but worse in others. Overall, the 2022 bond crisis lowered annualized and risk-adjusted returns.
Further research is needed to draw further conclusions about the usefulness of the 60/40 portfolio versus the 80/20 or other allocation strategies. In fact, our colleagues are in the process of implementing it. However, as our analysis shows, a portfolio maturing at the end of 2021 would have been superior to the same portfolio maturing at the end of 2022.
Admittedly, our study has other limitations than those mentioned above. It does not take into account the impact of currency translation, focuses only on developed markets, and has a shortened investment horizon. That said, it does provide a window into how different asset allocation strategies have played out over the past decade, how the 60/40 portfolio adds to risk-adjusted returns, and how anomalous years affect performance. Indicates whether to withdraw.
Rhodri Preece (CFA), David Terris (CIPM), and Karyn D. Vincent (CFA, CIPM) contributed to this article.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of CFA Institute or the author’s employer.
Image credit: ©Getty Images / alexsl
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