Five approaches to achieving the right asset mix for your portfolio

Five approaches to achieving the right asset mix for your portfolio

Most investors assume that smart stock picking is the key to long-term investment success. This view, however, is not always correct.

Proper asset allocation, and sector allocation, has been proven to be far more important in meeting your investment goals. You may be a great stock picker, but if the sector in which those stocks reside is not doing well, then your strong stock picks may still not provide good investment returns.

It is a hard concept to grasp. It is also a thesis that gets challenged, as some original academic studies referenced the volatility of returns rather than actual returns. We won’t go into the debate, because we think that all investors will agree that asset and sector allocation are still very important, whether to reduce volatility or enhance returns.

So, what’s an investor to do when setting up an asset mix? Let’s look at five options available, in addition to the options of just buying an actively managed fund or ETF. Keep in mind a proper asset/sector mix depends on many different factors. Things like your investment time frame, your age, need for capital and risk tolerance are big factors in setting your correct mix.

The do-it-yourself option

You can study the market, the economy, interest yields, valuations, money flows and so on, in order to get a good handle on what types of assets might work best for the conditions you are forecasting. For example, you might see some economic data that suggests the economy is slowing, so you buy more fixed-income securities, utility stocks and telecom stocks, hoping these do well when interest rates fall, or at least fall less if there is a big market correction.


We think robo-advisors offer a good basic solution for investors, but we disagree with the price structure of most companies. These companies provide a framework of questions to determine the right asset mix for you, and then set up a portfolio of (usually) ETFs in order to invest your portfolio along that specific asset mix. All good so far. However, the fees that robo-brokers charge are just too high, in our view. In addition to ETF fees, robo-brokers layer on another layer of fees for their own services. This fee is typically based on a percentage of your assets. That means a large investor will pay much more than a small investor, even though the process and work involved in setting the proper asset allocation for the two investors is essentially the same. We think large investors are getting ripped off.

Full-service advisors

Working with a full-service broker or advisor, or course, will (or at least should) get you the right portfolio asset mix for you, and your advisor can set a course of action for your portfolio based on your portfolio and personal specific needs and objectives. It is a great solution, and can be easily adapted if your goals or circumstances change, but of course comes at a cost. Most advisors will charge at least one per cent of your assets under a managed account scenario, but it is a good solution for those that do not want to do it themselves.

Copy-cat methodology

This method may seem a little sneaky, but it can certainly work. Investors choose a balanced ETF or mutual fund to follow, and essentially set up their own portfolio to mimic what the managers are doing. Vanguard’s Balanced ETF Portfolio (VBAL on TSX) for example, right now owns 59 per cent of its fund in equities, 28 per cent in government bonds and 10 per cent in corporate bonds. Canada is 41 per cent of assets; the US is 30 per cent; Japan is 5 per cent. Banks are the largest equity sector, at 11 per cent, followed by oil and gas at 4 per cent. An investor, with the assumption that the managers of the ETF do know what they are doing, simply mimics the asset mix that is held in the fund. There will often be a lag in some of the reporting of the fund, so you may never match exactly, but following the experts can still work, for those too cheap to pay ETF fees.

Couch potato

Some investors take the basic approach we discuss in the first point above, but rather than try to predict economic activity and interest rates, they simply decide that economic predictions are largely a mug’s game (and it usually is) and add no value. Instead, these investors decide on an asset mix that they are comfortable with, and only adjust things when allocations get out of line. For example, investor Bob might be fine with 50 per cent equities, 40 per cent bonds and 10 per cent cash. He leaves this allocation as is, until there is a significant change based on asset movements. Suppose the markets rise nicely, and his 50 per cent equities becomes 55 per cent of his portfolio. He would simply rebalance by selling some stocks and reallocating amongst the other asset classes, to get back to his original asset mix guideline. Simple, easy and cheap.

Keep in mind that none of these various options actually guarantees investment success. The goal here is to get you thinking about your portfolio asset mix. We find most investors take ‘bets’ on certain sectors and regions, instead of setting up a proper portfolio. Proactively monitoring your sector/geographic mix will reduce volatility of your portfolio, and reduced stress will likely be followed naturally by better investment performance.

Peter Hodson, CFA, isFounder and Head of Researchof 5i Research Inc., an independent research network providing conflict-free advice to individual investors (

Read More

Be the first to comment on "Five approaches to achieving the right asset mix for your portfolio"

Leave a comment

Your email address will not be published.