Tony Yuan（Head of Products and Strategy at AimStar Capital）
Published June 06, 2024, 4:20 PM EST. 3 min read.
In the past couple of days, major central banks worldwide have begun adjusting their monetary policies. On June 5th, the Bank of Canada reduced interest rates by 25 basis points, followed by the European Central Bank welcoming a definite 25 basis point cut on June 6th.
In response to these macroeconomic changes, we’ve conducted a strategic reassessment and adjustment of wealth management and investment allocations. With a 25 basis point interest rate cut, we believe it’s time to reconsider shifting cash proportions towards bonds. Gradually adjusting cash allocations to bonds can enhance portfolio returns during interest rate cuts without significantly increasing portfolio volatility.
Impact of Interest Rate Cuts:
In recent years, individual investments have leaned towards bank saving accounts, GIC, or cash equivalents. This inclination stemmed from investors’ apprehension following the 2022 downturn in both stocks and bonds. Moreover, the prolonged period of high interest rates allowed individuals to enjoy approximately 5% annual returns on cash investments. However, with the changing policies of global central banks and the already observed interest rate cuts, we anticipate swift adjustments in interest rates for personal bank savings and GICs. Consequently, individual investors can no longer easily attain 5% returns. Now is the opportune moment to reevaluate fixed income and the role of bonds in investment portfolios.
GIC Interest Rate Before the Rate Cut (June 3rd)
GIC Interest Rate After the Rate Cut (June 5th)
Why Asset Allocation, Why Choose Bonds?
Over the long term, bonds have played a crucial role in diversifying investment portfolios, reducing risks, and maintaining stability during market fluctuations. Nobel laureate Harry Markowitz likened diversification to a “free lunch” in finance, and bonds are foundational to this principle. Despite the anomaly of simultaneous declines in stocks and bonds in 2022, historical data from the past 50 years shows that in any year of negative equity returns, bond returns have significantly outperformed stocks, ensuring the effectiveness of diversification and asset allocation.
Current Situation:
1. Yield Advantage of Bonds: Compared to the period before the 2008 financial crisis, bonds currently offer healthier high yields. This presents a significant attraction for investors seeking stable returns amidst market uncertainties. Higher yields not only act as a buffer against stock volatility but also pave the way for higher price appreciation during future interest rate cuts.
1. Resilience against Volatility: When macroeconomic markets are uncertain, especially regarding interest rates and the stock market, individual investment choices become challenging. Most ordinary investors tend to hoard cash during uncertain times. However, this strategy poses significant risks to achieving long-term investment goals. Historical data shows that since 1980, bond allocations have averaged better returns than holding cash in the three years following peak interest rates.
2. Returns During Economic Recessions: If the European and American economies experience the undesirable scenario of economic recession or a hard landing after interest rate cuts, bonds can still reduce volatility due to their yield. Since 1980, bond returns during economic recessions have consistently outperformed stocks and cash, highlighting the value of bonds as a crucial component of investment portfolios.
Long-term Returns of Asset Allocation and Strategic Shifts:
AimStar has always emphasized the importance of asset allocation, with cash, bonds, stocks, and alternative assets playing different critical roles in wealth investment at different times. Although GICs may be a viable option for short-term stable returns, their lack of liquidity and the issue of missing out on other asset returns are worth considering for all GIC holders.
AimStar emphasizes the importance of various asset allocation strategies, and liquidity in various asset classes is also essential. By selecting high-quality products in various asset allocations, investors can fully utilize asset allocation to achieve more stable diversified returns. Currently, making fixed income bond allocations is the most critical strategic change.
Although future investments will face challenges due to economic uncertainties, adhering to well-structured investment plans for long-term investment goals is essential. AimStar encourages investors to build comprehensive and stable investment portfolios, safeguarding wealth and optimizing returns in dynamic market environments.
AimStar Capital Group Inc. is an independent full-service investment dealer with the Investment Industry Regulatory Organization of Canada (IIROC), specializing in providing Investment advisory and tailored wealth management services to individual investors, family trusts, and institutional investors. If you have any inquiries regarding personal financial services, investment portfolio adjustments, or private wealth management, please email us at info@aimstar.ca. We are committed to assisting you and ensuring the security of your privacy. Additionally, the AimStar expert team is available to provide one-on-one financial advisory services. We look forward to navigating your financial future together.