Why Balanced? For Returns and Managing Risk.
Daniel Arsenault, CFA, FRM, MBA
Investment Director - Equities
It’s close to impossible to predict what assets will perform the best (or worst) over time in any market. As a result, investors spread their savings across many asset classes and many countries or regions, according to their ability or willingness to take risk. This spreading out of assets is called “diversification”.
The colourful table below shows the returns of different assets over time. The chart puts the highest return at the top and the lowest return at the bottom, and different assets are colour-coded so it is easy to track where different assets rank in terms of top performers.
With only one exception, the chart shows that the same assets rarely perform in the same part of the chart year-over-year. The top performing assets one year are the worst in some years, and vice versa. By spreading your money across different asset classes and investing for the long term, investors experience the returns generated by the highest performing asset classes, without needing to guess which ones they might be.
Seek broad exposures for consistent performance
Simply diversifying your portfolio evenly across asset classes may improve returns and lower risk in your portfolio relative to trying to pick winners. A slightly better choice is to purchase a balanced fund, which shows consistent performance near the middle of the chart in every time period. The main reason for this consistency is that balanced funds invest across all of the different asset classes – equities, bonds and cash – and so gains exposure to high-performing assets when they do well.
Balanced funds have two advantages over simple diversification:
- They give the most risky assets less money than the less risky assets.
- Balanced funds allocate money to the assets where market opportunities are the best relative to the risks in those assets.
Balanced funds can be used as an anchor for the rest of your portfolio, or as an easy solution for do-it-yourself investors who prefer to have professionals manage allocation across assets. In either case, balanced funds can act as the core of a portfolio to help grow the hard-earned capital of an investor.
Balancing risk and return is tricky
Over time, the exposure to risk from global equity markets has produced larger returns for investors, but it has not been without major drawdowns of returns, sometimes losing as much as 50%. On the flip side, current low interest rates mean that cash returns are less than 1%, which is lower than the rate of inflation. Prices of groceries and other consumer goods are rising by far more than the interest we are getting on deposits.
To ensure that investors have enough retirement savings, or for whatever their financial goals are, they need to invest in more risky equities, income-paying bonds and more stable cash assets. The balance between these assets depends on how much risk the investor wants to take.
Balanced funds will invest in equities, bonds and cash in a way that reflects a consistent risk profile over time. This helps to maintain a consistent client experience. Investors should consider purchasing balanced funds to have professional money managers provide a consistent risk profile so they can pay attention to the parts of their life that are more important.
Talk to your financial advisor about how Mackenzie Balanced Funds can help your portfolio.