Tactical Approach To Balanced Investing vs. Fully-Invested ("Let It Ride") Approach

I do tend to go on about this, but as a case in point, when I see how impactful this is in a market that gets volatile, I get really excited about how we have found a way to keep a good deal of that volatility at bay.

Looking at the benchmark we use for a fully invested 60% equity and 40% fixed income balanced portfolio: blended total return of 60% ACWI and 40% XBB, the change in the 1 year total return (Bloomberg, Daily Basis) and allowing for fees and MER costs, from Sept 30 to Oct 11 was a staggering 3.54% drop with both stocks and bonds declining.

Certainly there was lots of volatility 1 year ago, which added to the wild swing. However, when we compared that to an actual client portfolio, structured with our models and significantly lighter on equity (for all of the reasons that we think we should be: http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html) than our standard target, there is a considerable reduction in volatility from one week to the next:

The client portfolio dropped from a 1 year return of 7.95% (after fees and costs) to 6.56%, a drop of 1.39%. Close to 40% less volatility over the same period of time and still well ahead of the benchmark return.

This is what we mean by stronger risk adjusted returns and it was what we work so hard to achieve.

Less risk, better than benchmark returns, lower volatility (keeping more of the growth when markets are giving it back).

Over the next week or so, our clients will be receiving their quarterly reports for the 3rd quarter. It was a good quarter for equity markets and we were light on our equity holdings, but we still managed to out-perform (the blended benchmark on a balanced portfolio), despite our more defensive stance.

When markets get more volatile (as we suspect they will), we (the managing partners at High Rock) and our clients will be able to hold on to those gains better than a fully invested portfolio.

That excites me!

Like being the underdog baseball club and sweeping the division series!

(well, perhaps not quite that exciting)