Opinion | It’s time for an upgrade of the engine that powers your investment portfolio

Volvo said that from 2019 all new models will be entirely electric or hybrid. This represents a historic turning point for the motor industry, and one from which investors would do well to take their lead: the world is changing and we must be prepared to change with it.

As fundamentally important as the combustion engine is for cars, traditional “balanced” portfolio construction was for decades the driving force behind long-term investment. But is it time for an upgrade?

We think so. In the past, traditional assets classes were associated with particular functions in well-diversified portfolios: investment-grade bonds provided yield, preserved capital, diversified against growth assets and were easy to liquidate if investors needed to boost their cash holdings. Meanwhile, equities provided attractive returns.

Today, these properties are being put to the test, and when asset classes struggle to do the jobs we have come to expect from them, investors need to rethink how they build their portfolios.

Bond markets have undergone dramatic change following the global financial crisis with far-reaching implications.

First, bonds’ ability to produce yield has been undermined by low interest rates. For bonds to generate meaningful capital gains, rates would have to decrease significantly — rates and bond values move in opposite directions — yet there is not much further they can fall.