Is it time to reevaluate your portfolio's "goalie"?


Investor Knowledge +
clock 5 Minutes =
New Thinking

In many sports, be it hockey, soccer or lacrosse, there is a goalie whose role is almost always to protect the net from the opponent scoring a goal. It’s always an added bonus when the goalie can contribute in other ways to the team's success, like distributing the ball or puck to enhance the team's playmaking ability. However, if this comes at the expense of defending the net – the primary purpose of the goalie – the added contribution is not usually worth the risk.

Fixed income functions similarly to a goalie for your portfolio. Its purpose is to defend the portfolio's value in times of market turmoil by supplying liquidity, diversification and stability. However, times have changed, and the time is right for revaluating how your portfolio's goalie is performing.

Part 2 of 5

The Asset Allocation Team has created a 5-part series of papers that addresses the evolution in our approach to asset allocation. Namely, how the 60/40 portfolio has served investors well in the past, why evolution is needed now more than ever and the approach to asset allocation at TD Asset Management Inc. (TDAM).

Our first paper illustrated that fixed income has been a core part of a balanced solution. The negative correlation with equities has historically given investors a "free lunch", by providing both lower risk with similar returns. However, record low bond yields have not only reduced the return potential of fixed income but also driven investors to search for higher yield, which further weakens the protection it provides.

Fixed income remains a core element - but exposure needs to be adjusted

In Part 2 of our series we highlight how global central bank monetary policies have had a significant and long-lasting impact that will affect all asset classes, but particularly fixed income and its role as a "goalie" for your portfolio. The article highlights how fixed income's role has evolved and how the right solutions can still play an important role in helping investors achieve their investment goals.

With structural changes and a new monetary policy regime, fixed income is expected to have lower yields and potentially lower expected returns for the foreseeable future. Against this backdrop, the role fixed income plays has changed and needs to be adjusted. The allocation to fixed income will need to be reduced within a traditional balanced portfolio, and other sources of diversification will need to be sourced.

Portfolios will always need a goalie

Despite these new challenges, it's important to keep in mind that fixed income’s original task of being your portfolio's goalie hasn’t changed. When fixed income does what it is intended to do, the rest of the portfolio can do its intended job as well. Having well balanced, protective, and liquid fixed income investments allows you to take more risk in search for higher return growth assets like equities and alternatives. Prudent active management within fixed income is even more important now as it can help investors access new return streams and higher yields without taking excessive risk in a search for yield.

Be sure to look for our upcoming articles that include the new ways in which TDAM views and explores a more modern portfolio.

The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.

Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.

The TD Wealth Asset Allocation Committee (WAAC) is comprised of a diverse group of TD investment professionals. The WAAC’s mandate is to issue quarterly market outlooks which provide its concise view of the upcoming market situation for the next six to eighteen months. The WAAC’s guidance is not a guarantee of future results and actual market events may differ materially from those set out expressly or by implication in the WAAC’s quarterly market outlook. The WAAC market outlook is not a substitute for investment advice.

TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank.

®The TD logo and other trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.

TDAM Connections at a Glance:

You might also be interested in:

Tune in Now

Tune in Now

TDAM Talks Podcast

Here's what's new

Here's what's new

Thought Leadership

Stay Current

Stay Current

Market Commentaries

Back to top Top