Finding Balance: A Global Approach

08 April 2024 by National Bank
Small stones placed one on top of the other on the bank of a lake

The story isn’t new. Many investors feel satisfaction during periods of sustained growth when investing passively in certain indices like the S&P 500 or likewise with a simple S&P/TSX Composite tracking ETF. However, during market turbulence, the sentiment often loses its luster when the portfolio consists only of these passive index funds. FOMO sets in when missed returns arise from other opportunities and it can cause many investors to act irrationally with their portfolios or even their investment goals. These periods of uncertainty shouldn’t be the only time investors seek more defensive, actively managed strategies amid equity and fixed income, helping to mitigate risks.

The Magnificent 7 versus the rest

As with the current equity market in the U.S., more specifically with the S&P500, there is a strong case for the companies that are part of the exclusive club called the Magnificent 7. Last year, they produced roughly 99% in terms of price return versus the overall S&P 500 index at 36%, largely due to their high-quality factor - positive fundamentals, strong cash generation, cost discipline, and edge towards investing in research and development.

Performance of the Magnificent 7 versus the S&P 500

(Graph: Price return since January 2023)
Source: CIO Office

Risks however can also be seen with elevated investor expectations, especially after strong earnings in an uncertain economic environment. Additionally, regulatory and antitrust questions from world governments pose further challenges as well as lingering impacts from geopolitical tensions. 

Ultimately, rather than timing the market and chasing the latest stock trend, investors need to look beyond the inevitable short-term fluctuations. Alternatively, investors can focus on a global balanced approach where projections remain largely positive with increased downside protection over the long term.

Graph of the expected annualized return and uncertainty based on investment horizon.

(Graph: Expected annualized return and uncertainty based on investment horizon)
Source: CIO Office Long-Term Market Expectations – Overview CIO Office (Data via Refinitiv). 1. For illustrative purposes only; subejct to change without notice; no guarantee of future performance. 2. Equity benchmark: 35% S&P TSX, 35% S&P 500, 20% MSCI EAFE, 10% MSCI EM, all in CAD. 3. Balanced portfolio: 21% S&P/TSX, 21% S&P 500, 12% MSCI EAFE, 6% MSCI Emerging Markets and 40% Canada Bond Universe, all in CAD. 4. Based on the historical interquartile range of returns since 1950.

A high-quality global balanced approach

Nevertheless, investors want to consider having exposure to these names, and having access is key. Access to these companies and a broader global set of stocks is good. Access to opportunities in other asset classes like high-quality fixed income, to help diversify, is even better. And access to seasoned active managers that can act quickly during challenging periods, can help to mitigate potential risks. Rather than focusing on potential biases or just the latest hyped company, having a focused view with an actively managed global balanced portfolio can lead to steady growth and help achieve long-term investment goals. 



Legal notes

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations.

This index provider is included in this document: Standard & Poor’s (S&P 500 Indices). This index provider is licensing its indices “as is”, makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness and/or completeness of its indices or any data included in, related to or derived therefrom, assumes no liability in connection with its use and does not sponsor, endorse or recommend National Bank Investments Inc. or any of its products and services. The above index provider does not guarantee the accuracy of any index or blended benchmark model created by National Bank Investments Inc. using this index. No responsibility or liability shall attach to any member of the index provides or its respective directors, officers, employees, partners or licensors for any errors or losses arising from the use of this publication or any information or data contained herein. In no event shall the above index provider be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, legal or other expenses, or losses (including, without limitation, lost revenues or profits and opportunity costs) arising out of or in connection with the use of the content, even if advised of the possibility of such damages.

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