Strategy And Risk: Part 2

In order to get rates of return at above-inflation levels , investors will need to take some "market risk" in their portfolios.

How much ?

Our research shows that a balanced portfolio, with a combination of fixed income (bonds and preferred shares) assets and global equity assets (large and small companies across all economic sectors) over a multi-year period can deliver rates of return well above the rates of inflation:

(click on this chart to enlarge)

• Rates of return on the vertical axis.
• Measure of risk / volatility (standard deviation) on the horizontal axis.
• 11 year time period (through the very volatile period from 2008-2009).

• A portfolio of 30% globally diverse equity assets and 70% fixed income assets, over 11 years has had an average annual return of approx. 6.77%. This is a portfolio that has a lower risk profile, because of it's heavier weighting of fixed income.

• A portfolio of 40% globally diverse equity assets and 60% fixed income assets, over 11 years has had an average annual return of approx. 6.85%. This is a portfolio that has a higher risk profile, because of it's increased weighting of global equity.

• A portfolio of 50% equity and 50% fixed income has returned approx. 7.16%.

• A portfolio of 60% equity and 40% fixed income has returned approx. 7.51%.

• A portfolio of 70% equity and 30% fixed income has returned 7.48%.

Why has the 70% equity (greater risk) portfolio under-performed the 60% equity portfolio?

Quite simply, the higher risk, more growth oriented portfolio underwent a greater degree of volatility during 2008-2009 and has taken a longer time to recover.

This makes the 60% equity portfolio a more "efficient" portfolio because it had less volatility through the 2008-2009 period and recovered more quickly.

Over different time periods returns can vary and historical returns do not guarantee future returns, however it is very evident that a balanced and diversified portfolio will help decrease long-term risk and allow reasonable and likely better than inflation returns.

Finding a strategic balance that reflects your plan is the next step.

That is the "secret sauce" in the management of your portfolio .

www.highrockcapital.ca