The Balanced Growth Portfolio. The Investor’s Sweet Spot.

In the ETF Model Portfolio page you’ll find a ‘suggestion’ for the Balanced Growth Portfolio. Of course it includes the 4 core portfolio building blocks.

AssetAllocationSnip

And for the Canadian investor, here’s how that ETF Portfolio might look. It is typical for Balanced Growth Portfolios to be in the range of 70-80% stocks and 20-30% bonds. As always, investors are free to get more ‘creative’ around the edges by adding foreign bonds, other fixed income, developing markets and perhaps some smart beta additions.

Portfolio 3 Holdings Full Snip

This is certainly a simple but effective ‘plain vanilla’ portfolio that invests in the developed stock markets of the world, with risks managed by Canadian bonds.

In the headline I suggested that the Balanced Growth Portfolio is in the sweet spot. The 75/25 model can typically deliver returns that equal an all-stock portfolio with less risk or volatility. It can deliver better risk-adjusted returns. It’s also in the sweet spot for retirees who are often best served with generous growth potential and a modest amount of bonds for support. Those bonds are there to address that sequence of returns risk that will arise when the stock markets go in the tank.

Here’s a simple example using the TSX 60 (XIU) for stocks and the Canadian Universe Bond Index (XBB). Portfolio 1 is the Balanced Growth model. Portfolio 2 is the all-stock model. The chart is courtesy of portoliovisualizer.com. Of course, past performance does not guarantee future returns.

The time period, limited to the availability of the ETFs, is January of 2001 to end of September 2018.

Balanced Growth vs StocksFor the period, the returns are identical. And we can see that the Balanced Growth Portfolio has delivered superior gains (is in the lead) for much of the time frame. The Balanced Growth Portfolio is delivering the same returns with less risk.

In the financial crisis of 2008-2009 the drawdown (portfolio value decline) on XIU was 43%, for the Balanced Growth model it was 32.5%. The all-stock portfolio was underwater for 5 years and 5 months, the Balanced Growth model was under water for 2 years and 7 months. Those bonds can certainly punch above their weight when it comes to reducing portfolio risk.

The event that we have on display here is an investment version of the Tortoise and the Hare. The faster rabbit (Hare of course from the famous Aesop’s fable) goes into the lead when the stock markets are on a tear. But when the stock markets hit those major corrections or recessions the more steady tortoise (Balanced Growth model) moves into the lead as the Hare gets tired and trips up. The lower risk model, in certain periods, can deliver matching or better gains precisely because it carries less risk; it ‘falls less’ it has less of a hill to climb. And that certainly sounds counterintuitive as we are often told that investors are rewarded for taking on additional risks. Many would suggest that is an investment myth.

On that you can check out my review of the Tangerine Dividend Portfolio. The indices used in that model find lower risk by way of a dividend focus and quality screens. Those High Dividend Yield indices have beat the markets with lower volatility in Canada, US and International.

Now certainly the all-stock versions of portfolios can outperform the Balanced Models  when we are in periods where the stocks are on an incredible bull run. Let’s have a look at the Balanced Growth Model using a more internationally diversified portfolio, and with a longer period of evaluation. Portfolio 1 is 37.5% each of US stocks and International Developed Markets and 25% broad-based US bond market. Portfolio 2 is the all-stock benchmark with 50% US stocks and 50% Developed Markets.

We’ll begin in January of 1995 to allow a 5-year period when the stocks can run before the major market correction of 2000-2003.

International Balanced GrowthWe see the Balanced Growth Model (the blue line) take back the lead through the market corrections. Once again, the all-stock model moves into the lead during the stock market bull runs, and then the stocks ‘give it all back’.

For the full period the annual rates of return (CAGR).

Balanced Growth – 7.5% annual

All-Stock – 7.75%

We are not being rewarded handsomely for taking on that additional risk. With respect to that risk the all-stock portfolio was down 54% in the 2008-2009 financial crisis, the Balanced Growth model was down 41.4%. That is still a significant portfolio decline, we should always keep in mind that while the portfolio model has the word ‘Balanced’ in the name, this is an aggressive portfolio that can be quite volatile at times.

The suitable time horizon for this model is generally in the area of 7-10 years or more.

Once again, please ensure that you are ‘comfortable’ and knowledgeable enough to manage your own investments. If you want or need a managed portfolio there are many simple and wonderful lower fee options including the Canadian Robo Advisors. You might also consider a fee-for-service advisor.

If you have any questions feel free to send a note to cutthecrapinvesting@gmail.com

Thanks for reading, please hit those share buttons below this blog post. If you’d like to follow Cut The Crap Investing you will find that button at the very bottom of this page.

2 thoughts

  1. You might want to consider HXT instead of XIU. Lower fees, no US withholding fees, true total return product that reinvests dividends. Tracks the index better than XIU (perfectly in fact).

    ________________________________

    Like

    1. Thanks Hans, to each his or her own. I am not a fan of synthetic products. I like the real holdings, the real dividends. But I certainly understand the advantages of HXT when all is working well. Not sure what happens with that in any kind of real market turmoil. Each investor should invest as they see fit, and know the products that they choose. I certainly have more research to do on the HXT’s of the world. Thanks for your comment, much appreciated. Dale

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s