The "Balanced" (60/40?) Investor: Topic for Discussion & Analysis | New Thread

ivormonee

Everyone invests in a way that is unique to them, even though they may share the same, or closely resembling, goals and attitude/ approach to risk. Similar levels of return can, and are, achievable through quite different portfolios, with different asset allocations and varying ongoing strategies, and all for a similar level of risk when measured by standard portfolio measurements such as standard deviation (volatilty).

I'd like to specifically look at "balanced" investors in this thread, those who are neither particularly cautious nor "aggressive/ adventurous" with their portfolio construction. Traditionally, this has been the domain of the "60/40" investor, or Morningstar's "moderate" and "moderately adventurous" categories (which cover funds with around a 60% equity composition, although this does vary through time and different funds within each category will vary in their equity allocation).

The questions: How do you construct your portfolio? Do you choose actively managed or index tracking underlying funds? How do you pick them? Just a small number of funds or many? And how to you measure performance? What benchmark(s), if any, do you use?

Care to share your portfolio (ie. list of funds with percentage allocation to each). I hope for this thread to prove to be informative and insightful. What would be a real bonus will be to see if people's different approaches provides any clues to methods and practice that yield better results as well as any patterns that may emerge.

dunstonh

Traditionally, this has been the domain of the "60/40" investor

In the UK, Balanced referred to 40-85% equity.    It was felt that the name was too vague in what it meant and that some people would invest above their risk profile without realising.  So, they dropped the Balanced name and went for the description.

The questions: How do you construct your portfolio? Do you choose actively managed or index tracking underlying funds? How do you pick them? Just a small number of funds or many? And how to you measure performance? What benchmark(s), if any, do you use?

Sector allocation using fluid weightings supplied from an actuary.
Core and satellite approach with a mix of passive and active.
Selected after due diligence and reserach.
14 funds in the portfolio.  However, usally no more than 10 in use at any one time.
I tend to use the closest VLS fund for benchmark personally.     Sector average is not a good benchmark given its wide variation.

Prism

I have two portfolios, SIPP and non-SIPP. The SIPP is 100% equities and is detailed on the Great British Invest Off thread.
The non-SIPP portfolio would fall into moderately adventurous I reckon but if I was to put a split on it, it would be around 70/30. I use VLS80 and VLS60 as comparisons, partly because the UK equity allocation is around the same level.

The equity component is all active funds and trusts -
Global - Fundsmith, Lindsell Train GE,
Smaller Companies - Montanaro Better Life, Smithson,
Emerging Markets -  FEET, Mobius Investment Trust,
Infrastructure and property - HICL, IHR, GRID @ ~5.5% yield

The fixed interest component is cash and bonds -
Instant access @ 0.5%
Fixed interest savers @ 2.2%
Vanguard global short term bond index fund @ ~1%

Linton

The questions:

How do you construct your portfolio?

Total investments split into 3 separate portfolios each with a simple objective
Income - generate sufficient highly diversified dividend and interest income to cover day to day expenses alongside guaranteed annuities/DB pension/SP.
Wealth Preservation - inflation matching growth with low volatility.  
Growth - to provide for sustained inflation matching growth of all the portfolios with maximum diversification 

In addition there is a large cash, mainly PB, holding to ensure day to day expenditure can be sustained in difficult economic conditions and to provide for short term major one-off enxpenditure.

The split between equity, bonds and other assets is simply the result oif the design of the individual portfolios.  There is no target. However it is roughly 60% equity and 40% bonds.  50% of the bonds are corporate bonds required by the income portfolio.

 Do you choose actively managed or index tracking underlying funds?

I have no strong views either for or against passive or active funds.  However I generally find it much easier to get the allocations I want with active funds because of the very limited choice in style offered by passive funds caused by capitalisation weighting.  Trackers very rarely reach the short list.

How do you pick them?

FIrstly by detailed asset allocation within the specific and the overall portfolios providing a good level of diversificationj.
Secondly by consistent performance
Thirdly by absolute performance

Just a small number of funds or many?

minimum required to meet objectives with high diversification
Income: 10
WP: 3
Growth: 8

And how to you measure performance?

The primary performance measure for the overall set of portfolios' is the maximum sustainable inflation-linked expenditure which can be supported.  This is calculated from a year by year financial plan.  In addition reports of the returns of each portfolio can be easily generated if required for more detailed analysis.

What benchmark(s), if any, do you use?

None at all, except perhaps VLS100 for my growth portfolio for amusement - it is reassuring to see how easy it is to outperform that fund.  I have no real interest in how any benchmark performs, all that matters is how well my objectives are met.

JohnWinder

A descriptor such as the '60/40' nomenclature dichotomises the elements into two distinct categories, the more distinctive the clearer the separation.

I found this provided new information and added insight to its basis:

'Ideally, Tobin argued, investors should own this market portfolio, but then add risk-free assets to reduce their overall risk exposure.....This idea of dividing the portfolio between risky and risk-free assets – or, if you prefer, a growth element and a defensive element – came to be known as Tobin’s Separation Theorem. It was principally for that and other work in relation to MPT (modern portfolio theory) that Tobin was awarded the Nobel Prize in1981, nine years before Markowitz was awarded his.'

https://www.betafolio.co.uk/blog/2021/02/11/the-two-components-every-portfolio-needs/

quirkydeptless

Here's mine.

I have a SIPP and a S&S ISA which I DIY on the H&L platform. The SIPP is all in one Wealth Preservation OEIC  (Troy Trojan X). The ISA is a split of ETFs and IT.

Together they X-Ray as about 60% equity, 30% bonds, 10% Other. 

I have a Company DC Pension which I have been contributing to for 10 years into its default life-staged managed fund, i.e. it is moving from diversified equity/bonds to cash/bonds as it approaches my configured retirement age of 60. It invests mainly in L&G  Index trackers. I leave it alone to do its stuff

Prior to that I have over 20 years of contributions towards a DB scheme which will pay out at 65 which has some invested AVCs attached

Even though contracted out, I only need 1 year of NI contributions to get full state pension at 67

Plus I have some bits and bobs of shareholdings, cash, and cashback chasing investments.

I was 55 last year and could retire now if I wanted, so in contemplation of that but undecided.

X-Ray of full portfolio is about 45% equity, 45% bonds, 10% other

Breakdown is as follows:

36.5% DC                 Diversified Index Trackers

14.2% SIPP             Wealth Preservation OEIC  (Troy Trojan X)  

 8.7%   DC               Bonds

 8.2%  ISA                Wealth Preservation IT (PNL)

 8.2%  ISA                Growth (IWDG) 

 8.1%  ISA                Growth (VWRP)

 6.1%  ISA                Bonds (IGLH) 

 5.3% Unwrapped     Cash (Average Interest 1.85%) 

  3.1% DB AVC          Legal & General Multi Index 3 

  1.0% DC                  Cash 

   0.5% Unwrapped    Shareholding (SSE) 

   0.1% Other              Small share/fund holdings 0.1

MaxiRobriguez

60/40 portfolios would have done exceptionally well in the last decade with interest rates near zero.

A reversion of that is likely to unwind those gains from this so called "balanced" allocation.

Agree with poster above that the split shouldn't be between equity and bonds anymore but between risk and risk free assets. Personally to me I'm going without bonds now and instead will hedge with a small proportion of cash and gold.

Malthusian

MaxiRobriguez said:

Agree with poster above that the split shouldn't be between equity and bonds anymore but between risk and risk free assets. Personally to me I'm going without bonds now and instead will hedge with a small proportion of cash and gold.

Virtually everyone with equity and bonds also has risk free assets.

Nothing wrong with you investing in 100% equities if that's what you want, but for most people it would be unsuitable. When markets are falling, people compartmentalise. Even if they have £100k in cash and only £10k invested, if that £10k falls to £6k they will still panic and cash it in and lose £4k. To them it will be a 40% loss, not a 4% loss. If it only falls 20% to £8k then hopefully they won't.

Linton

I dont see how one can possibly come up with an equity/non equity strategy unless one's objectives are clear.  What an economic guru said 40 years ago in different economic circumstances is in my view irrelevent unless one can read the objectives the guru was trying to satisfy and the arguments that led to his conclusion.  The mere fact that he said something, or is said to have said something, is not really very helpful.

On specific objectives:
1) Short term expenditure: Known expenditure in the next say 5 years that isnt covered by guaranteed income should be in cash. No question in my mind.
2) Medium term expenditure: in the medium/long term cash is not risk-free because of inflation.  On the other hand at the moment I know of no completely satisfactory investment that can meet the need for moderate but low risk returns. I use Wealth Preservation funds where I hope the fund managers with a proven record can do what I can't, or at least can't without spending detailed management time.  Smoothing investments like With Profits Funds could also play a part here.
3) Long term comfort blanket, the objective being to ensure that investors don't lose sleep during a crash with the danger that they convince themselves to sell out.   I am with Malthuisian here.  This is mainly a problem for relatively inexperienced investors who could well look at their equity investments separately.  A good answer would seem to be to use multi-asset funds at an appropriate risk level as one would naturally look at the fund as a whole.  If one doesnt have the knowledge to do a job properly it is best to pay a professional.
4) Income: if one wants ongoing income (whether one should is not an argument for here) then diversification away from equity really is very advisable.  I use corporate bond funds, funds which make loans to infrastructure projects and anything else I can find.

There may be other objectives eg a relatively small amount of non equity may be desirable for long term rebalancing.  But only when one has identified them can an appropriate strategy be devised.

MaxiRobriguez

Linton said:

I dont see how one can possibly come up with an equity/non equity strategy unless one's objectives are clear.  What an economic guru said 40 years ago in different economic circumstances is in my view irrelevent unless one can read the objectives the guru was trying to satisfy and the arguments that led to his conclusion.  The mere fact that he said something, or is said to have said something, is not really very helpful.

On specific objectives:
1) Short term expenditure: Known expenditure in the next say 5 years that isnt covered by guaranteed income should be in cash. No question in my mind.
2) Medium term expenditure: in the medium/long term cash is not risk-free because of inflation.  On the other hand at the moment I know of no completely satisfactory investment that can meet the need for moderate but low risk returns. I use Wealth Preservation funds where I hope the fund managers with a proven record can do what I can't, or at least can't without spending detailed management time.  Smoothing investments like With Profits Funds could also play a part here.
3) Long term comfort blanket, the objective being to ensure that investors don't lose sleep during a crash with the danger that they convince themselves to sell out.   I am with Malthuisian here.  This is mainly a problem for relatively inexperienced investors who could well look at their equity investments separately.  A good answer would seem to be to use multi-asset funds at an appropriate risk level as one would naturally look at the fund as a whole.  If one doesnt have the knowledge to do a job properly it is best to pay a professional.
4) Income: if one wants ongoing income (whether one should is not an argument for here) then diversification away from equity really is very advisable.  I use corporate bond funds, funds which make loans to infrastructure projects and anything else I can find.

There may be other objectives eg a relatively small amount of non equity may be desirable for long term rebalancing.  But only when one has identified them can an appropriate strategy be devised.

The "typical 60/40" portfolio supposedly reduces volatility and concentration risk whilst still allowing reasonable gains.

It's not that hard to replicate those end goals by replacing bonds with a cash allocation in a time of low interest rates and where the threat of inflation could lead to sell offs in both equities and bonds.

It doesn't have to be more complicated than that. 

Linton

MaxiRobriguez said:

Linton said:

I dont see how one can possibly come up with an equity/non equity strategy unless one's objectives are clear.  What an economic guru said 40 years ago in different economic circumstances is in my view irrelevent unless one can read the objectives the guru was trying to satisfy and the arguments that led to his conclusion.  The mere fact that he said something, or is said to have said something, is not really very helpful.

On specific objectives:
1) Short term expenditure: Known expenditure in the next say 5 years that isnt covered by guaranteed income should be in cash. No question in my mind.
2) Medium term expenditure: in the medium/long term cash is not risk-free because of inflation.  On the other hand at the moment I know of no completely satisfactory investment that can meet the need for moderate but low risk returns. I use Wealth Preservation funds where I hope the fund managers with a proven record can do what I can't, or at least can't without spending detailed management time.  Smoothing investments like With Profits Funds could also play a part here.
3) Long term comfort blanket, the objective being to ensure that investors don't lose sleep during a crash with the danger that they convince themselves to sell out.   I am with Malthuisian here.  This is mainly a problem for relatively inexperienced investors who could well look at their equity investments separately.  A good answer would seem to be to use multi-asset funds at an appropriate risk level as one would naturally look at the fund as a whole.  If one doesnt have the knowledge to do a job properly it is best to pay a professional.
4) Income: if one wants ongoing income (whether one should is not an argument for here) then diversification away from equity really is very advisable.  I use corporate bond funds, funds which make loans to infrastructure projects and anything else I can find.

There may be other objectives eg a relatively small amount of non equity may be desirable for long term rebalancing.  But only when one has identified them can an appropriate strategy be devised.

The "typical 60/40" portfolio supposedly reduces volatility and concentration risk whilst still allowing reasonable gains.

It's not that hard to replicate those end goals by replacing bonds with a cash allocation in a time of low interest rates and where the threat of inflation could lead to sell offs in both equities and bonds.

It doesn't have to be more complicated than that. 

Why would you want to reduce volatility whilst allowing reasonable gains?  Different reasons for wanting to do this will lead to different ways of doing it.  For example a young long term investor may want this because they are afraid of losing all their money.  An experienced retired investor may want to protect future income in the short and medium term. There is not one single answer that optimally solves all problems.  An experiemced investor could work something out themselves.  An inexperienced investor would in my view be better off with a multi-asset fund.