The Risk in De-Risking Now

The extraordinary market volatility and poor equity returns of recent years—as well as fears about the macroeconomic outlook—have prompted many investors to contemplate de-risking their overall portfolios. Perhaps they should—but first, they should contemplate the return side of the equation.

De-risking almost always means putting a much larger share of an asset allocation in bonds. Historically low yields make bonds unusually unattractive at this time. At 1.9%, our current median projected return for global seven-year sovereign bonds is worse than 90% of the returns in our normal range of return projections. That is, we’d seldom expect to see bond yields this bad.

Wide credit spreads do make corporate bonds more attractive, but that only helps so much. As the Display below shows, we project that the median 10-year compound return on a diversified global bond portfolio, with 60% invested in investment-grade corporates and 40% in sovereigns, is likely to be only 2.8%, less than half our normal forecast of 6.3%.

What's Really Conservative?

Indeed, expected bond returns are so poor that investors who want the return normally expected of bonds alone would probably need to allocate 60% to equities! As for investors aiming for the returns normally expected of a traditional 60/40 asset allocation, they’d probably need a 100% equity allocation (not a prudent choice, in my view).

De-risking may make sense for retirees who have more than enough saved to cover their financial needs for the rest of their life, or for pension funds that are fully funded. But for those investors who need to grow their portfolios to cover their obligations, we think a more flexible approach is more likely to help them meet their goals: maintaining a significant allocation to equities, but adjusting the allocation dynamically in response to changing expected returns and risk. They can always de-risk their strategic allocation later, when market returns improve their funded ratio.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York

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