When Boring Is Good!

I have, in past blogs, talked about the best way to counter volatility in a portfolio by being balanced and diversified.

Why is volatility in a portfolio a bad thing, when higher degrees of risk can offer higher rates of return?

The more a portfolio's value goes down in times of financial market volatility, the longer it takes to recover:

(you will definitely have to click on this chart to blow it up)

• This is a study of a number of model portfolios with various levels of balance and diversity over an 11 year period.
• a 30-70 portfolio has 30% fixed income (various bonds and preferred shares) and 70% equity (exposure across various geographical regions: US, Canada and International markets).
• With Return on the vertical axis and Risk (standard deviation) along the horizontal axis, as might be expected, the 30-70 portfolio has the lowest annual average return and the least amount of risk.
• As is generally expected, as we move out the risk spectrum (higher degrees of risk) by taking on a greater % of equity and a lower % of fixed income, historically, on average, the portfolio models have produced a greater return.
• However, as we get to the 70-30 portfolio, we can see that the "curve" has flattened and become slightly inverted.
• This is the impact of the volatility caused by the 2008 financial crisis where the portfolio with the most risk has taken a greater deal of time to recover.
• The portfolio that has performed the best, relative to the risk taken (what we refer to as "Risk-Adjuted Returns) is the most "efficient" portfolio.
• This is not a portfolio that out-performs in times when equity markets are charging ahead, but it is also a portfolio that will have more limited downside when volatility is high.
• This is when Boring Is Good!

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund