Investors have had a rollercoaster over the past 18 months and while things are feeling more stable now, it would come as no surprise if there are some investors still feeling uncertain.

The cost-of-living crisis and record-high energy prices, the war in Ukraine and Middle East, and rising (and falling) inflation have all contributed to market volatility (fluctuations in prices) and uncertainty. There has also been plenty of market noise about where we should and shouldn’t invest during times like this and so often, our judgement can get clouded. 

I find that, in circumstances like this, it is helpful to draw on past experiences and have conviction in my beliefs. Of course, past performance is no guarantee of future results, but when it comes to investing, drawing from our past experiences can be a powerful tool to navigate the ever-changing landscape.

Recent events have only highlighted, for me, the value of staying invested and diversified¹ during difficult times.

Don’t give in to the noise

A balanced portfolio is one that invests in both shares and bonds² to reduce potential volatility, such as 60% in shares and 40% in bonds. Periodically, pundits declare the death of the balanced portfolio.

These doomsday headlines re-emerged towards the end of 2022 and in early 2023 as bonds suffered heavy losses – as the Federal Reserve (the US central bank, also referred to as the ‘Fed’) and the Bank of England embarked on their most aggressive interest rate hike cycle in four decades. Balanced portfolios had a poor year, along with pretty much all investments. 

But on the basis of one poor year, many so-called experts were happy to write off this tried and tested investment strategy. It’s stood the test of time through multiple stock market, interest rate and economic cycles.

At Vanguard, we believe in staying balanced. In fact, it is one of our four key investing principles. Investing in the right mix of shares and bonds could have a bigger impact on your returns than anything else you do³. Shares typically give you a higher return over the long term, but are riskier. Whereas bonds are more stable but offer lower potential returns. 

Following the sell-off⁴ in 2022 and early 2023, bonds then went on to see a meaningful recovery last year⁵ and our long-term outlook for them is now better than it has been for many years.

We now expect both UK and global bonds to deliver annualised returns of around 3.5% to 4.5% over the next decade, compared with the 0.8%-1.8% we expected at the end of 2021, before the rate-hiking cycle began⁶. However, do remember that these projections do not reflect or guarantee future results.

Catchy phrases like the “death of 60/40” are easy to remember and don’t require complex explanations. But such statements ignore basic facts of investing, focus on short-term performance and create a dangerous disincentive for investors to remain disciplined about their long-term goals. When portfolios are falling in value, it’s our nature to want to fix things. It makes us feel better. But more often than not, staying the course and sticking to your plan is the right thing to do. 

Money market funds: Not a long-term solution

Similarly, volatile markets coupled with rising interest rates have made money market funds (a low-risk investment that aims to give you a slightly higher return than cash) more attractive in recent years. Over the year to 31 January 2024, the sector has seen net retail sales of £3.2 billion according to the Investment Association⁷.

Money market funds are great for investors wanting to hold cash for the short-term; perhaps for those pending making an investment decision once a transfer has completed, or for investors in drawdown looking to hold some income in cash. 

But they are not intended as a long-term part of an investment portfolio where shares typically drive returns. As the chart below shows, shares have historically delivered higher returns than cash after inflation. Meanwhile, bond holdings are a useful addition to a portfolio to offset market volatility.

Returns from £10,000 in cash and shares, before and after the effects of inflation

Past performance is not a reliable indicator of future results. 

Notes: Cash returns represented by the UK Sterling Overnight Index Average benchmark (SONIA), global shares by the FTSE All-World Index with dividends reinvested; inflation by the UK Retail Price Index. SONIA reflects the average rate of interest banks pay to borrow overnight.

Source: Factset, Vanguard calculations based on period 31 December 1998 to 31 December 2023.

Why I plan to stay the course

Over the past couple of years, my investment journey has encountered the ups and downs like all investors. Notably, the poor performance of bonds which led some investors to question their merit in a portfolio.

However, history reminds us that bonds have often acted as a steadying force amid market turbulence and that holding them in your portfolio has historically offset some of the swings in share prices. It’s all about balance, and finding the right level of risk and reward⁸.

So what I have done with my investments? My portfolio remains divided between shares and bonds with an 80% weighting towards shares and 20% towards bonds. My new contributions have been invested in Vanguard’s FTSE All-World UCITS ETF for its globally diversified portfolio and low fees⁹ and Vanguard’s Global Credit Bond Fund for its bond exposure.

The bond fund follows an active management strategy, which is where an investment manager (or managers) select investments in accordance with the fund’s investment objectives, which may be to outperform relative to a benchmark index.

This means they actively research and make decisions about what the fund will invest in. I feel this approach gives the fund an edge in terms of its potential to outperform the index, though of course this is not guaranteed.

Looking ahead, I plan to do more of the same. I do occasionally make changes to my portfolio but that is driven by changes in my goals – not market noise.

¹ Being diversified is spreading your risks across asset classes, sectors as well as different countries and regions. See article: What is ‘diversification’ and why does it matter so much to your investment success?

² Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

³ A study by Brinson Hood and Beebower, published in 1986, looked at returns for 91 US pension funds from 1974 to 1983 and found that roughly 80% of the variance of returns came from their strategic asset allocation. Since then, many other studies have come to similar conclusions, including Vanguard’s own research.

⁴ A sell-off occurs when a large volume of securities (shares or bonds, for example) are sold in a short period, causing the price of that security to fall in rapid succession.

⁵ After negative total returns for global bonds of -1.5% in 2021 and -12.2% in 2022, total returns from 1 January 2023 to 29 December 2023 (the last trading day of 2023) were +6.2%. Source: Vanguard calculations based on data from Refinitiv, based on year-to-date performance of Bloomberg Global Aggregate Bond Index Sterling Hedged (hedged back to local currency to manage currency fluctuations).

⁶ Source: Vanguard projections generated by the Vanguard Capital Markets Model® (VCMM) as at 31 December 2023. Note: Figures are based on a 1-percentage point range around the 50th percentile of the distribution of returns for bonds. All projections are in pounds sterling. Benchmarks used for asset classes: UK bonds: Bloomberg Sterling Aggregate Bond Index; global ex-UK bonds (hedged): Bloomberg Global Aggregate ex Sterling Sterling Hedged Bond Index. Hedged means hedged back to local currency to manage currency fluctuations. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

⁷ The Investment Association Fund Statistics: January 2024.

⁸ Vanguard’s Four simple principles.

⁹ On average, our ongoing fund costs are 0.20% while there is one account fee of 0.15% per year (capped at £375 per year for accounts above £250,000). See more information on our fees.

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