Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 505

Passive investing has risks too

In 2022, investors were hit by a double whammy of both equities and bonds suffering similar levels of declines in prices. The perceived wisdom is that this is not supposed to happen. Bonds and equities are meant to be uncorrelated, so that when one struggles the other does well.

The reality is that bonds and equities fall at the same time more often than expected. In fact, a look over history shows the period where equities and bonds were completely uncorrelated is more of an anomaly, particularly in periods of rising inflation.

This means the traditional diversification strategy of 60:40, with 60% in equities and 40% in bonds, is not the silver bullet some may think it is.

Diversification matters in many ways

Now this doesn’t mean you should rip up your investment approach and do something completely different. But it would be foolhardy not to try and learn from recent experience and be more open-minded in your view of what diversification means. It’s not just about different asset classes, although that obviously helps, it’s also about broadening your horizons for different styles, different regions and even combining active and passive strategies.

For many, the active versus passive debate can be divisive: you’re either one or the other. But both approaches have their strengths and weaknesses, which suggests that perhaps the answer is to create a blended approach.

For example, 2018-2021 was a tough period for value-oriented managers but 2022 showed the ugly side of a purely passive portfolio. Everyone agrees that timing markets is a fools' errand, but what if you leave a passive ‘core’ in place and supplement it with a valuation-focused active manager? This can help offset the Achilles heel of a purely passive approach of being fully exposed to the whole market as it becomes over-priced.

Importantly you can add as many managers as you like to your portfolio, active or passive, value or growth or something more contrarian. But it’s no use ‘diversifying’ across 10, 20 or 30 managers if they are all doing the same thing, with the same focus and holding the same stocks in their portfolios.

The key is to choose managers that have a compass that they stick to, staying true to their investment philosophy and process no matter what the market cycle throws at them. It may be painful at times, but you’ll know what you’re getting over the long-term, and each one can act as a diversifier for your overall portfolio because they are each doing something different.

… and valuation matters, too

In the latest 'Everything Bubble', growth stocks were the darlings of the markets, helped along by the money being pumped into the system by central banks in the wake of the GFC and the Covid-19 pandemic.

But now it appears that bubble is bursting, and more people are beginning to recognise that valuations matter.

Focusing on the broad market cycle misses something crucial - the cycle in valuation gaps, which can have just as big an impact on investor returns. Not all assets go up by the same amount during a bubble, and the same is true when that bubble bursts. This can lead to different experiences depending on what type of investment you’re in, whether it's the market darlings, or the unloved, boring businesses.

From a diversification point of view, this means it can be beneficial to build a portfolio from the bottom-up, focusing on fundamentals, rather than starting from a high-level top-down macro viewpoint. At Orbis, asset classes such as equities, bonds, commodities, and hedged equity all compete equally for space in our portfolios. We aim to select investments across asset classes to find those that will combine to offer the most attractive balance of risk and reward. By doing this, we end up with a portfolio that can be very different to the benchmark both on the equity and the bond side.

As contrarian investors we recognise that not everyone has the courage to stand above the parapet and potentially look foolish in the short-term, even when they know the long-term thinking is sound. But as a diversification tool, it can be powerful to have alternate viewpoints in a portfolio.

While it is a cliché, the old adage 'don’t put all your eggs in one basket' still holds true for investing. When you’re constructing a portfolio, the different baskets of risk and return should be truly different and robust enough to deliver a good balance of investment approaches that can weather any environment.

 

Shane Woldendorp, Investment Specialist, Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances. For more articles and papers from Orbis, please click here.

 

  •   19 April 2023
  • 2
  •      
  •   

RELATED ARTICLES

Stars align for fixed income

The far-flung past as prologue

Chris Joye on why stocks and property are set for a poor year

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

Latest Updates

Exchange traded products

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Taxation

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Retirement

Three considerations before reshaping your legacy plan

Many retirees hope to leave a legacy. Proposed trust tax reforms could force families to rethink. The question is not how much to leave behind, but whether today's inheritance plans will still make sense as circumstances change.

Investment strategies

Why experienced investors still get markets wrong

Retirement is approaching. Markets are noisy. And every headline seems to demand action. The biggest investment risk isn't fear, greed or market volatility, it often arrives disguised as research and sensible risk management.

Shares

Why pay more for less?

Conditions were stacked in favour of professional investors in 2026. Most still fell short, raising questions about where investors should look for value. Meanwhile, an alternative strategy continued to make its case.

Investment strategies

Bleeding air out of the bubble

Equity valuations have fallen sharply over the past year, yet investors have largely been spared the volatility and losses that typically accompany a de-rating. What explains this unusually orderly reset? Here are five key drivers.

Strategy

Has AI gone rogue?

We worry about AI becoming conscious. But what if consciousness isn't the issue? The more unsettling possibility is a machine capable of pursuing objectives relentlessly, without motives, emotions, or awareness of any kind.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.