Asset Allocation: Finding the Right Balance for Your Portfolio

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This white paper explores the performance of several balanced portfolio allocations in various economic environments and provides insights into the impact of asset allocation on portfolio performance. In the first part of the article, we analyze the performance of two portfolios over a long period: the Balanced Portfolio (50% equities, 50% bonds) and the AllWeather Portfolio (25% equities, 25% bonds, 25% gold, 25% cash). We make the following observations:

• The performance of both portfolios fluctuates significantly over time, making it difficult to determine which portfolio performs better. • The All-Weather Portfolio tends to outperform during periods of rising inflation, while the Balanced Portfolio outperforms during periods of decreasing inflation.
• When interest rates increase sharply, the real performance of the Balanced Portfolio tends to be negative.
• The performance of the Balanced Portfolio tends to be relatively weak during the two years prior to an economic recession, and to improve significantly in the subsequent period when economic stimulus measures are implemented.
• Correlations between assets also affect portfolio performance. 
• The Balanced Portfolio's performance is better when the equity/ bond correlation is positive, while the All-Weather Portfolio seems to be less sensitive to this correlation effect. We conclude that maintaining a static allocation over a long period of time is not an optimal solution to navigate the various environments.