How bad can it get?

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  By Guest Blogger Sinan Terzioglu

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The 2020s have tested investors in ways few other decades have. We experienced the first global pandemic in a century, two bear markets, inflation reaching forty-year highs, the fastest interest rate hiking cycle in history, one of the worst years for bonds, and the seventh-worst year for U.S. equities since the 1920s. These events have led many to question the reliability of traditional investment strategies.

The 60/40 portfolio, which allocates sixty percent to stocks and forty percent to bonds, experienced its third-worst year of performance since the Great Depression in 2022. The following table, sourced from Ben Carlson’s blog Wealth of Common Sense, shows how 60/40 portfolios composed of U.S. stocks and bonds have performed during other notable periods in market history.

The poor market performance in 2022 of both stocks and bonds fueled interest in alternative approaches such as the 50/30/20 model. This model allocates fifty percent to equities, thirty percent to bonds, and twenty percent to alternative assets including private equity, private credit, real estate, or hedge strategies. The goal is to restore diversification and reduce correlation to public markets.

Despite growing interest and strong promotion by major financial institutions, alternative investments carry significant risks that often make them unsuitable for most retail investors.

First, they are often highly illiquid. Assets such as private equity, private credit, and real estate cannot be easily sold or converted to cash and typically require long holding periods. In both Canada and the U.S., some private equity and private credit funds have recently suspended redemptions to manage liquidity pressures. This poses a significant risk for investors who rely on their portfolios for regular income and limits their ability to rebalance effectively.

Second, these investments tend to carry high fees that erode returns over time. Private equity funds commonly use a “2 and 20” structure—charging about 2% annually on committed capital and taking 20% of profits as carried interest—while private credit funds often exceed 3% in total costs. Compared to low-fee ETFs, these layers of charges can substantially reduce net returns.

Third, alternative strategies are inherently complex. They often rely on financial engineering, derivatives, and multi-layered structures that lack transparency and do not provide daily pricing, making them difficult for most retail investors to fully understand. This complexity can lead to confusion about how returns are generated and what risks are involved.

Finally, many alternative investments concentrate their holdings in a small number of positions or sectors and often employ leverage, which significantly increases vulnerability during market downturns. This lack of diversification amplifies losses and exposes investors to heightened risk. When markets experience sharp declines, these concentrated and leveraged strategies have little flexibility to absorb shocks, often resulting in severe drawdowns. For investors seeking stability and long-term growth, such concentrated approaches can undermine portfolio resilience and lead to outcomes far worse than those of broadly diversified strategies.

Since the beginning of the 2020s, investors who maintained balanced and globally diversified portfolios of publicly traded ETFs have achieved average annual returns of more than 7%. This result highlights an important principle: even when headlines make each market cycle seem unique or uncertain, strong long-term performance does not require adding complex alternative asset classes or sophisticated strategies. Success has consistently come from remaining invested, exercising patience and maintaining discipline.

Balanced and globally diversified portfolios provide resilience during market downturns and position investors to benefit from recoveries without making significant changes. They also demonstrate that investors do not need to introduce complex hedge strategies, which often aim to limit short-term losses but come at the cost of future gains.

For example, by April 8 of this year, the S&P 500 had endured its fourth worst start to a year since the 1920s. Just one day later, on April 9, the index surged 9.5% following news of a 90-day pause on U.S. tariffs.

Today, the S&P 500 is up 18% for the year, illustrating that missing only that single best day would have cost an investor nearly half of the year’s gains. In contrast, investors who allocated to hedge strategies aimed at limiting short-term losses generally experienced inferior outcomes, as these approaches traded meaningful upside potential for limited downside protection.

In summary, successful investing is about avoiding costly mistakes. The most effective approach is to remain committed to a balanced and well-diversified asset allocation built on liquid, publicly traded ETFs. Regular rebalancing and a clear focus on long-term objectives are time-tested principles that help investors manage uncertainty and achieve sustainable growth over the long-term.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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About the picture: “This guy ado[ted me,” writes Ed. “This picture was taken yesterday. It’s from an RV park in La Penita de Jaltemba Nayarit. T’s a bit off the wall – and he routinely beats up that cat.”

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Source: https://www.greaterfool.ca/2025/12/08/how-bad-can-it-get-2/