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As interest rates seem set to rise significantly and markets experience sporadic volatility, investors are increasingly looking for a portfolio that offers both protection and growth. While it might seem impossible in this climate, a balanced portfolio, sometimes referred to as a diverse portfolio, can you provide you with both.
Traditionally, most investment experts consider stocks to be high-risk, high-growth investments, while bonds are often lower growth and lower risk. The former is for investors willing to entertain higher stakes to potentially increase their profits, while the latter focuses on capital preservation and modest growth. A balanced portfolio can give you the best of both.
A balanced portfolio is an investment that combines both stocks and bonds. It works a little like having both your offensive players and defensive players on the field at the same time. You get the benefits of long-term growth without the increased risk associated with investing solely in stocks. To achieve this long term growth, you may have to give up the higher returns that investors get when the stock market performs exceptionally well, as it has in recent years.
Traditionally, a balanced investment approach calls for a mix of 60% stocks and 40% bonds, and most investment funds will try to stick to this asset mix as closely as possible. However, the growth of ETFs alongside real estate and other potential investments have provided additional opportunities for creating a balanced portfolio.
The term diverse portfolio is often used interchangeably with a diverse portfolio. While the two terms have similar meanings and seek similar results, there are subtle differences. Diversity is a critical factor in balancing your portfolio. Essentially diversification means ensuring that you do not put all your investments in one asset class, industry or even geographic region, as this increases your potential risk if that asset fails.
Every portfolio should contain a least some element of diversification. You can diversify your investments in a variety of ways. These can include investing in various instruments, stocks, bonds, ETFs, or cash and cash equivalents such as a savings account. Within these asset classes, you should also attempt to diversify your holdings with respect to industry and geography. That means, for example, not putting all of your stock holdings into mining and investing, perhaps, in international or emerging markets.
Diversification can help protect your investments from the devastating effects of a single investment going wrong. You should base the amount of diversification you pursue on your tolerance for risk and your investment objectives.
Simply put, balanced and diverse portfolios are designed to minimize risk to your investments. They help preserve your investment while providing you with a modest rate of return. Because you have invested in a diverse asset mix of bonds and stocks, you are protected if one part of the market, or a particular investment, fails to perform or, worse, loses money.
Balanced portfolios are the perfect choice for anyone who is risk-averse or wants to preserve their investment and is willing to forego potentially higher returns to achieve that peace of mind.
Risk tolerance tends to decrease over time. Older investors have less time to recoup losses, particularly those who intend to use their investments to fund their retirement. They may also have more immediate needs for their investments.
Profits and even losses can put your portfolio out of balance. It is essential to rebalance your portfolio occasionally, as most institutional and other professional investors do. Rebalancing means selling off or shifting investments to ensure you get back to a 60/40 mix or whatever your goal is. For example, if the stock market enjoys a sudden run or one of the stocks splits, you may find yourself with an unbalanced portfolio. Instead of 60% stocks and 40% bonds, you may find yourself holding 70% stocks and 40% bonds. This puts your investment at increased risk. If the stock market experiences a downturn, you could lose money. Rebalancing portfolios regularly helps prevent this.
You could also consider re-balancing in geographical terms which could help pro-tect your portfolio from sudden localized downturns. If you have a registered ac-count, however, be cognizant of the rules limiting foreign investment holdings.
In Canada, you have a wealth of options to choose from when it comes to bal-anced portfolios. All major financial institutions, including online brokerages and robo-advisors offer some form of balanced portfolio.
Here are a few examples of balanced portfolios in Canada that provide some great insight into what a balanced portfolio should look like:
Exchange Traded Funds (ETF) are pooled investments similar to mutual funds. However, unlike mutual funds, they are bought and sold on stock exchanges. They are an excellent choice for diversification because they hold multiple assets rather than just one, such as a specific stock. ETFs themselves can also be balanced, containing an assortment of investments including stocks, commodities and bonds, for example.
You can achieve a balanced portfolio with ETFs by investing in a balanced ETF or purchasing several ETFs holding different types of investments from various sectors and geographies.
Diversifying your portfolio helps reduce your risk and increase the return on your investment. Experts offer a variety of tips for diversifying your portfolio. These include:
1. Diversify your asset allocation in both stocks and bonds
2. Invest in Index or Bond funds which add additional diversity to your portfolio
3. Leverage ETFs with built-in diversification
4. Purchase money market instruments including Guaranteed Investment Certificates (GICs) and treasury bills (t-bills) for their ease of liquidation in lieu of cash
5. Select investments from various industries
6. Leverage a geographically diverse set of investments
| Portfolio | Annual Rate of Return | Best Year | Worst Year | Years With a Loss |
|---|---|---|---|---|
| 100% stocks | 10.3% | 54.2% | -43.1% | 25 of 95 |
| 40% stocks/ 60% bonds | 8.2% | 35.9% | -18.4% | 19 of 95 |
| 50% stocks/ 50% bonds | 8.7% | 33.5% | -22.5% | 20 of 95 |
| 60% stocks/40% bonds | 9.1% | 36.7% | -26.6% | 22 of 95 |
| 100% bonds | 6.1% | 45.5% | -8.1% | 19 of 95 |
Ensuring your investments stay balanced can be time-consuming. It requires research and regular reviews to rebalance your accounts. There are other solutions for investors who lack the time, expertise, or interest in this. You can purchase a balanced portfolio through most brokerages, including online ones like Wealthsimple and Questrade.
Both Wealthsimple and Questrade offer low fee investment portfolios that you can take advantage of. These portfolios leverage a team of investment experts who select the investments in the portfolio and ensure they remain balanced. Essentially they do the work for you. If you prefer to choose your own investments, both of these online brokerages also offer self-directing investing.
Robo-advisors are another option. Robo-advisors are cloud-based investment platforms that invest on your behalf, primarily in the ETF market. They bundle various ETFs based on your investment goals and risk tolerance. All offer a basket of ETFs specifically for investors seeking a balanced portfolio. Basically, you give them your money, and the robo-advisor invests it for you and rebalances as necessary. They require no additional attention from you.
Several major banks and other investment firms have robo-advisor subsidiaries.
Leads to lower levels of volitivity and risk than investing in a single asset class, industry or market sector
Creates potential for additional profits, particularly through foreign investments
Offers increased protection for your initial investment
Can be simple to do if you leverage a fund, such as an ETF, or leverage a robo-advisor
May lead to additional transaction costs required for rebalancing
Over-diversification (or diversification for its own sake) can result in additional risk if the investor doesn’t understand the investment or marke
Can be challenging to maintain investment balance and diversification
Balanced portfolios are not for everyone, however if you are unable or unwilling to risk losing your entire investment, they are an excellent choice. Our tolerance for risk tends to diminish as we get older and for good reason. Many of us need those investments for retirement, travel or other needs. A balanced and diversified portfolio may not always grow as quickly but it does help mitigate investment risk by ensuring all of our investment eggs are not placed in a single basket.
For investors who lack the experience, knowledge and time required to effectively “play the market” or continually rebalance their portfolios, investing in a balanced portfolio through a robo-advisor or with an low-fee online brokerage such as Questrade or Wealthsimple makes sense.
The rate of return for your portfolio, including balanced portfolios, is dependent on several factors, from your specific investments to the performance of the market and interest rates. In 2021, for example, market equities boasted incredibly high rates of return that were often in the double digits, but bonds and other passive investments suffered as interest rates remained low. However, most experts suggest that the expected return on a balanced portfolio in Cana-da is generally around 5%, excluding fees. That said, many balanced portfolios outperformed the market in recent years with some returns as high as 10 to 17 per cent.
Like a portfolio of stocks and bonds, the best-balanced ETF will include a mix of assets classes from various industries. To choose the best ETF portfolio for you, look carefully at the combi-nation of assets and avoid choosing based on the name of the ETF alone as sometimes the ti-tles are misleading. Look for ETFs from various sectors as well as commodity-based ETFs and international, both emerging and developed, markets. Finally, pay close attention to the fees charged for your ETF. Most are low-cost. However, as with anything, hidden or unex-pected costs can significantly lower your rate of return.
Robo-advisors offer you low-cost investment opportunities, often without the minimum in-vestment required by traditional investment firms. Some are fully automated and leverage complex artificial intelligence (AI) driven algorithms, while others employ a combination of human and AI advice to make investment decisions. While robo-advisors are not for every-one, you can trust them to balance your funds and keep your investments diversified, par-ticularly if you invest in an ETF bundle structured for diversity and balance.
