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Explaining rocky returns to your more risk-averse clients

Commentary by Fran Kinniry, Head of Investment Advisory Research Team

Investors with bond-centric portfolios are likely feeling fragile after unusually poor first-quarter returns. Here are a few tips for handling them with care.

  • The first-quarter 2022 market downturn squeezed equity and fixed-income asset classes alike. This less common market event of both negative stock and bond returns likely affected all investors, but its impact may have gained special notice from conservative, bond-centric investors because they also have the highest loss aversion.
  • You might find it beneficial to reach out proactively to your most conservatively invested clients, as they may be less accustomed to simultaneous stock and bond drawdowns of the magnitude we just witnessed.
  • As their advisor, you’ve spent a great deal of time building a strong relationship with your clients to gain their trust and develop a thoughtful financial plan. One unfavorable quarter should not trigger a change to that plan if it was appropriate going into the year. Educating your clients on the frequency and magnitude of these types of events—and keeping their long-term objectives in focus—can help them maintain perspective and stay committed to their plan.


Perhaps you remember as a kid trying to play the piano, throw a ball, or some other activity that required more developed motor skills. If so, you likely also remember how one side or muscle became much stronger and more adept than the other. Similarly, as an investment behavioral coach, you’ve possibly grown quite proficient in helping your more aggressively allocated, equity-centric clients “stay the course” in equity bear markets.

But like a right-footed soccer player who has the chance to score the winning goal—with his left foot—advisors are now being confronted with the need to conduct unfamiliar conversations with their most conservatively invested, bond-centric clients.

That’s because generally speaking, bonds have experienced a 40-year bull market—there’s seldom been bad news to communicate; but the first quarter of 2022 delivered some of history’s worst bond returns, in addition to negative stock returns. This year’s first-quarter drawdown of –5.9% ranks as the third-worst quarter for bonds in the last 50 years.1 As a result, for the first time in a long time, you will likely need to place greater emphasis on coaching your more conservatively invested clients.

These more loss-averse investors may feel an elevated state of anxiety and unease—and will need to be approached with care and empathy. Following, we provide some context on how this unusual quarter shaped up, along with a few pointers to help guide your conversations with clients.


Buckle up—conservative investors likely to find the quarter unsettling

Typically, the greatest pain in a portfolio comes to those investors more heavily weighted towards equities and other risky assets. However, in the first quarter of 2022 both stocks and bonds had negative returns—so, conservative investors have experienced a drawdown that is much less common for them. In fact, bond returns for the quarter were worse than stocks. In the past 50 years, an investor with a 30/70 stock/bond mix has only experienced three worse quarters. 1  

This differs markedly from the experience of a more aggressive 70/30 investor. They’ve experienced similar or worse quarterly performance 23 times, or on average, every two to three years. Said a different way, the conservative 30/70 investor just experienced a return of –5.7% that would rank near the bottom percentile over the last 50 years.1 To put that in context, the same percentile loss for a more aggressive 70/30 investor would be a much larger –13.0%;2 instead, the first quarter of 2022 saw the 70/30 investor “only” experience a –5.5% drawdown (see chart below).

For your conservatively invested clients, it’s a matter of helping them put things into perspective. Historically speaking—yes, bonds saw one of their worst quarters. But comparatively speaking, when equities are in a bear market they tend to fare much worse. Also, you can point out that this type of performance from bonds has, so far, proven exceedingly rare.


A tale of two return profiles—mostly bonds versus mostly stocks

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Notes: The 30% stock/70% bond and 70% stock/30% bond portfolios comprise the Spliced US Bond and Spliced US Equity return series, weighted according to their respective stock and bond allocations. Bond portion of portfolios is composed of Spliced US Bonds, as represented by IA SBBI U.S. Intermediate-Term Government Bond Index from April 1 to December 31, 1972; Bloomberg U.S. Government/Credit Intermediate-Term Index from January 1, 1973, to December 31, 1975; and Bloomberg U.S. Aggregate Bond Index thereafter. Stock portion of portfolios is composed of Spliced US Equity as represented by the FT Willshire 5000 Index from April 1, 1972, to June 30, 1994; MSCI USA Investable Market Index from July 1, 1994, to June 30, 2001; and CRSP US Total Market Index thereafter.

Sources: Vanguard analysis of Morningstar Direct data, as of March 31, 2022.


Bond yields have risen in the past two years

As shown below, during 2020, the 2-year and 10-year U.S. Treasury yields were as low as 0.12% and 0.62% respectively, and at the end of the first quarter sat at 2.28% and 2.32%, respectively. Most of history has shown that remaining committed to one’s investment plan is likely a much better alternative to additional de-risking (such as moving further into bonds or money markets). This especially applies in real purchasing power terms. So, in addition to managing drawdown risk from the markets, the advisor and client should together balance and manage purchasing power risk—that is, the risk the investment portfolio does not keep up with inflation over a long time horizon.


Increase in interest rates has led to higher current yields on fixed income

U.S. Treasury securities yields since mid-2019

Notes: Chart depicts the 3-month U.S. Treasury security yield, as represented by the market yield on U.S. Treasury securities at 3-month constant maturity; The 2-year U.S. Treasury security yield, as represented by the market yield on U.S. Treasury securities at 2-year constant maturity; and the 10-year U.S. Treasury security yield, as represented by the market yield on U.S. Treasury securities at 10-year constant maturity.

Sources: Vanguard analysis of Federal Reserve Bank of St. Louis data, as of March 31, 2022. 


As we know, when the financial markets are volatile, investors can feel strongly compelled to change their financial plan and their stated portfolio asset allocations to stem any perceived continued losses.  Yet, it is often the case that staying the course is the better path in the long term. Often this doesn’t mean standing still, but taking the action of rebalancing into the underperforming asset class.  It’s most often best to stick to the long-term plan that you and your client have built together, with changes being made because of changes in their goals, objectives, risk appetite and other aspects of their life, not because of changes in the markets. 


Getting the message across

For some clients, the dynamics contributing to 2022’s disappointing first-quarter performance will seem evident and understandable. For others, especially those who viewed fixed-income investments as drama-free safe havens, their quarterly statements may come as a shock.

We recommend taking a proactive approach and reaching out to clients, if possible, before they call you. Here we offer a few guiding principles to help you structure your conversations:

  • Communicate from a place of empathy. Putting yourself in their shoes, you understand that investing in bonds has historically provided their capital with shelter from much of the volatility more common to riskier equities. You have an opportunity to put this atypical bond-market event into context for them—before conversations with their friends and family, or reading news headlines prompts them to question their long-term investing plan.
  • Take care to avoid promissory statements. While your goal is to provide comfort and understanding, you also want to give clients a realistic picture about the future. And the truth is, none of us knows for certain what the future holds for the markets (thus, you’d do well to avoid statements such as, “no need to worry, because the bond market has bottomed”). You can think of every interaction with your clients as the opportunity to build or lose trust, credibility, and authenticity; it’s like a bank where you are depositing or withdrawing trust. Candor is a net contributor to your trust balance with clients.
  • Focus on the relationship between long-term risk and return premiums. Historically, stocks have provided higher returns than bonds or cash but have carried a higher degree of risk. If investors were not compensated for the additional risk they took over longer time periods, no one would buy the higher-risk assets. Such market pressure pushes down the price of these assets to a level where risk is eventually adequately priced into the market. Bonds, in turn, should also over longer periods provide higher returns and carry greater risk than cash. Again, you can remind clients that portfolio asset allocation balances principal risk and purchasing power risk—the risk that their balances lose value to inflation. 

Proactively sharing how unique the quarter has been, while providing your empathy, care and counseling, can go a long way toward helping your clients stick to their financial plans and keep their long-term goals on track.


1 Sources: Vanguard calculations using data from Morningstar, Inc., as of March 31, 2022.

2 Given recent concerns about rising inflation, we performed the same analysis using quarterly real returns (inflation adjusted) and found that results were largely consistent.



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Publication date: April 2022

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