The balanced portfolio?

al_yrpal

I am showing my ignorance but….?

Is having a balanced portfolio the right way to invest, or is it just a way of saying ‘I’m tracking the market’ with a certain bias. One prominent broker used to have a website where you could answer some questions on your attitude to risk, which then offered tranches of various funds to form a balanced portfolio said to be commensurate with that risk. He seems to have withdrawn it, I wonder why?

We invest to make money in such things as shares, funds, trusts or bonds. I can see the danger in being too heavily committed to one part of the market, it’s dangerous because sectors (like energy) tend to move together, and if they move down a lot that’s bad. But why should we try to ape the market with a broad spectrum of investments? I noted one poster claiming that rather than investing in a FTSE tracker, the potential investor should widen his holdings because the FTSE didn’t match the weighting of the whole spectrum of ‘the market’ – why? If your balanced portfolio includes tranches of investments that are clearly waning, what is the point?

Surely a sensible portfolio should include a spread of investments of things that are on the up. I can see the sense in buying a small quantity of things that are down, but look like they are going to go up. But as for all this balancing stuff….. please explain?

darktrader

"Balanced Portfolio" can mean almost anything.

In my case I "balance" all my savings/investments.

30% in cash

20% in "low" risk shares

40% in "medium" risk shares

10% in "high" risk shares

(In my pension I use the same spread but the cash element is split between low and medium risk investments.)

In addition I own my own property with no mortgage.

dunstonh

Surely a sensible portfolio should include a spread of investments of things that are on the up. I can see the sense in buying a small quantity of things that are down, but look like they are going to go up. But as for all this balancing stuff….. please explain?

How do you know when things are going to go up and when they are going to go down? You don't. So having a balance across the range allows you not to put all your money into one area. One one thing may be going down, another will be going up, so it balances it out.

I work very much on the basis of buying into sectors that have gone down and funding them from ones that have gone up. However, never wholesale. ie. wouldnt move 100% from latin america to europe. Just move the profits over to rebalance.

Different strategies will work at different times. The rebalancing strategy reduces the potential for growth in the good times but doesn't suffer anywhere near as poorly in the bad times. So, someone rebalancing over the last 3 years would probably see lower returns than someone with no rebalancing in the same risk areas. However, if you go back 7 years, the rebalanced portfolio would have more.

If everyone knew the answer to investing perfectly, it wouldn't be anywhere near as fun. As long as you invest with diversification and dont average out the risk more than you are willing to accept, the rest of it is luck most of the time.

carnet

Although obviously paying some heed to sectors/asset classes, I tend to be a "fundpicker" targeting principally small/new funds (which historically outperform), run by either unrecognised ( so far) talent or able old hands starting something fresh with a point to prove.

This sometimes creates what many would consider to be an "unbalanced" portfolio (eg very low US - which is made up elsewhere ie. Global/ IT's) - and others would term "overly diversified".

Current spread is :

UK Growth (inc Smaller Cos) 7%
UK Income 17%
Far East (ex Jap) 3.5%
Far East (inc Jap) 5.5%
Australasia 2%
China 2%
Japan 7%
Europe 8%
Global 10%
IT's 7%
Various Tactical - Managers Own Money/Staff "Pension Funds" etc 11%
Resources 7%
GEM/Eastern Europe 6%
Financials 2%
Technology 2%
Healthcare 0.5%
Latin America 1.5%
US 1.0%

Although this could look very different in a few months (or even weeks )