Evolving Portfolio Benchmarks: Changes Coming in 2025

Celebrate! 2024 will likely (there are a couple of weeks left) be a banner year in investment markets. But instead of discussing performance in this WJNotes, we will focus on some exciting changes coming to our investment benchmarks. Recently, we've discussed changes to our retirement planning approach in numerous blogs and at our luncheon in October. An essential aspect of the new approach is the segregation or bucketing of investments based on objectives and time horizons. For legacy assets that clients aren't likely to spend, we've written about a new WJ investment strategy called Enhanced Growth, our most aggressive portfolio. While conceiving of enhanced growth and how it fits into our lineup of benchmarks, we realized it would be beneficial to change some of the names and allocations of our other benchmarks. We discuss the changes below.  

Why do benchmarks matter?

At WJ, benchmarks are critical to our investment management process and serve multiple functions:

• They provide a performance evaluation standard, allowing clients to assess their individual performance compared to market performance.
• They establish a risk level that clients are willing to accept and ensure that their portfolio aligns with their goals.
• They guide investment strategy formulation, informing asset allocation decisions and portfolio optimization.
• They enhance transparency and facilitate clear communication with clients, providing a common reference point for discussing investment results and strategies.
• They provide the ability to set expectations about the future by analyzing past performance during different market regimes.

The proposed changes will increase the ability of our benchmarks to fulfill these functions.

What changes are you making?

The following table summarizes the changes we will be making:

As the table shows, we are renaming all benchmarks and changing the stock/bond weight of the Defensive, Moderate, and Aggressive benchmarks.    

Why are the benchmarks changing?

We believe clients might be misinterpreting the difference in risk between our current benchmarks. Clients might be choosing benchmarks that are too conservative, limiting long-term growth. The current names (Conservative, Moderate, Aggressive) imply significant risk differences that don't exist. In reality, the benchmarks are similar in risk, especially in the context of the range of portfolio risk levels investors have to choose from, as the following chart shows: 

Besides the name changes, we are decreasing the stock allocation for the Aggressive benchmark from 80% to 70% and increasing the stock allocation for the Moderate benchmark from 60% to 70%. Both will now be called the Growth benchmark. We are adjusting the benchmarks to maintain material differences between our benchmarks. This is especially important as we expect clients to segregate or bucket their portfolios into different pieces with separate benchmarks.  

The Defensive benchmark was primarily an alternative to stock-heavy portfolios that clients could temporarily shift to if they were concerned about market volatility. We never meant it to be a permanent benchmark for a client's entire portfolio because it will not generate sufficient returns over time.  

The new Inflation Plus benchmark, which will replace the Defensive benchmark, will focus on generating returns above Inflation. It will only be appropriate for a portion of a client's portfolio and will be combined with another benchmark like growth or enhanced growth.  

Can you provide more details on the allocations of the new benchmarks?

The following table shows more details on the new benchmarks:

What impact will the changes have on my portfolio?

The specific changes depend on your current benchmark as follows:

Note that the changes will not materially change the risk characteristics of benchmarks and corresponding portfolios, and the adjustments are within the parameters discussed in your current investment policy statement. Nevertheless, to fully communicate the changes and ensure clients are aware, we will ask clients to sign new investment policy statements through DocuSign.

We will be sensitive to taxes when making the adjustments, so we may delay trades if they have negative tax consequences.

When will the adjustments be made?

We intend to implement the new benchmarks and adjust portfolios in the first quarter 2025.

Will there be changes to portfolios in addition to the benchmark changes?

Yes. TUA (Simplify Short-Term Treasury Futures Strategy) and TYA (Simplify Intermediate-Term Treasury Future Strategy) were purchased over the past two years to extend the duration or maturity of our bond portfolio. We will sell both funds and buy a new fund, RFIX (Simplify Downside Interest Rate Hedge Strategy). RFIX is a more capital-efficient option to extend duration, so we can buy less of it and purchase other preferred funds with the remaining capital. We also will sell TUA and TYA this year and harvest losses in taxable accounts.  

What if I have questions?

As always, we are available to discuss how the changes impact your portfolio. Don't hesitate to get in touch with us if you have questions.  

Thank you

We're grateful for your 25 years of trust and support. We recently surpassed $500 million in assets, which is a testament to your confidence in us. We don't take this responsibility lightly and have built an outstanding team dedicated to exceeding your expectations. Thank you for being part of our journey – we're committed to your continued success.

We wish everyone a Merry Christmas and Happy New Year!