Balanced Asset Allocation: How to Profit in Any Economic Climate

Chapter 2Your Portfolio is Not Well Balanced

Good balance is particularly important in today's uncertain economic climate given the wide range of potential outcomes. Most investors probably agree with this argument, considering the current atypical economic environment and the considerable central bank response. Indeed, printing massive amounts of money and resorting to other unusual stimulative measures are not activities that we are used to seeing. Both the state of the economy and the reaction to conditions are undeniable signs that we do not live in normal times.

Consequently, most investors would reasonably wish to hold a well-balanced mix of asset classes. In fact, most investors (including you, most likely) feel that they already do own a well-balanced portfolio and are appropriately positioned for the present uncertainty. That disconnect is the topic of this chapter. You think your portfolio is well balanced, but it is not.

What Is Good Balance?

Let's begin with the definition of good portfolio balance. What does it mean to be well balanced? Most significantly, you should consider the return pattern of the portfolio over a very long time period. The return stream should be as steady as possible and should certainly not fluctuate considerably through time. Consider two portfolios that have achieved the same returns over a 30-year time frame: Portfolio A and Portfolio B, as depicted in Figure 2.1.

Figure 2.1 What Is Good Balance?

Portfolio A performed very strongly ...