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Bonds Are Likely Too Heavily Weighted In Most Passive Portfolios

Passive portfolios rely on historical performance for their relative weighting of assets. To the extent that future returns match historical averages, the portfolios perform as expected. The big 35 year bull market in bonds from 9/81 through 7/16 that saw yields on the 10-year US treasury fall from 15.32% to 1.50% skewed passive portfolios weightings in bonds such these portfolios have higher allocations to bonds than future bond performance would indicate. Bond returns for the foreseeable future are likely to be lower than average (see blog post: Historical Bond Performance Points To Lower Future Returns).

Portfolios using modern portfolio theory optimize portfolio weightings along the efficient frontier to minimize risk for a given return or maximize return for a given risk. The data these portfolios use for optimization is historical data, therefore they are optimized in a historical sense and likely have a higher allocation to bonds than future bond performance would indicate.



The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

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