Bond yields went way up. Here’s what happened after. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ A third-quarter market update Hi there, The dominant theme in markets last quarter was a sharp increase in bond yields (the annualized return an investor expects over the lifetime of a bond). This shift happened because the economy has been stronger than expected, leading investors to think central bankers will keep interest rates higher for an extended period. Since bond rates are set by investors’ expectations, when those expectations went up, so did yields. As a reminder, bond yields have an inverse relationship to bond prices. So when yields on Canada’s aggregate bond index rose from 4.3% to 4.9% in the third quarter (the highest yield this millennium), returns dropped 4.5%, putting us in the worst bond market on record. Stocks were also affected, but less so: after experiencing strong returns over the previous nine months, major world stock indices declined by 2%-4% last quarter. As a result, Wealthsimple’s classic portfolios declined by 3%-4%, with more stock-heavy portfolios outperforming more bond-heavy portfolios. This period demonstrated the benefits of diversification. For example, our private credit fund, which does not have a negative sensitivity to interest rate changes, returned about 4% for the quarter, providing diversification for investors who added it to their portfolios. Long term, this is normal While this is not the kind of quarter many investors want to see, these fluctuations are not unusual. You can see that in the cone chart below, which shows the range of expected outcomes alongside the actual performance of a Wealthsimple balanced portfolio made up of 50% stocks and 50% bonds. Stocks and bonds typically outgain cash (e.g. savings accounts, treasury bills) by 2%-4% per year because, generally speaking, you trade uncertainty for more positive returns. The longer your investment horizon, the higher your odds of earning positive returns relative to cash become: about 65% of one-year periods will outperform, 75% of three-year periods, and over 90% of ten-year periods. It’s yet another reminder that investors have traditionally been best served investing through market cycles and remembering that recent returns are not a great guide for what will happen in the future. All the best, Ben Reeves Chief Investment Officer Your opinion matters I’ve been sending these updates more frequently lately, and I’d love to know if you’re finding them useful. Yes, useful Could be better Not for me Wealthsimple, 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Refer a Friend Privacy Policy Unsubscribe Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. All information and commentary provided is for illustration purposes only and is not investment advice or recommendations. All investments involve risk. To get more info on our products, investment decisions, fee schedules, user testimonials, promos & more visit wsim.co/disclaimers. Sources for chart: Bloomberg, Wealthsimple. Total Return Statistics from MSCI US Net Total Return Index, TSX Composite Total Return, MSCI EAFE Net Total Return, and MSCI Emerging Markets Net Total Return, Bloomberg Barclays Canada Aggregate Bond Total Return Index, International Stock Earnings Yields from MSCI Emerging Markets (7.6%), EAFE (7.4%), and US (4.8%) Indices. Odds of underperformance based on portfolio with 0.4 Sharpe Ratio assuming normal distribution of returns. All index returns do not reflect an actual portfolio. The indicated performances are historical for the period indicated. The rate of return does not take into account any tax payable. Past performance is not indicative of future performance. Wealthsimple returns are based on a performance composite. Managed accounts are offered by Wealthsimple Inc., a registered portfolio manager in each province and territory of Canada. Self-directed investing is offered by Wealthsimple Investments Inc. (WSII). WSII is a member of the Canadian Investment Regulatory Organization (CIRO). Customer accounts held at WSII are protected by Canadian Investor Protection Fund (CIPF) within specified limits in the event WSII becomes insolvent. A brochure describing the nature and limits of coverage is available upon request or at CIPF. © 2024 Wealthsimple Technologies Inc.