Lessons Learned: Asset Mix Matters

In the world of investing, a common refrain is that “past performance is not indicative of future returns,” which is true. However, the past does have a story to tell: one of risk and return, volatility and growth.

Before we start, have you determined your target asset mix and compared it to your current asset mix? Below is the full range of portfolio types from conservative to aggressive, all equity. Which one is your target and which one are you currently using?
 

 

Find your portfolio type(s) in the portfolio slideshows below. Compare how good or bad a single year could be. Compare how many bad years have occurred and how bad they were. Compare the price you pay for safety, the difference in fluctuations of that $100 investment over time between a conservative, balanced, aggressive and 100% equity portfolio.

What type of portfolio did you own in 2008? All-equity portfolios fell more than conservative portfolios did.  Did you experience a similar drop in value?

Each portfolio type defines a trade-off between defensive and offensive strategies, between keeping out money (keeping it safe) and seizing the opportunity to grow it. It’s up to you to set your mix that establishes the acceptable trade-off between the two. That will define the type of investor you are and guide your investment strategy.

Let History Be the Judge: Risk-Return Trade-Offs

The following slideshows display the historical volatility of risk and return of five target portfolios, including 100% equity. As you review these slideshows, keep in mind the following:

  • While returns fluctuate year after year, a well-diversified portfolio typically experiences reduced volatility over time.
  • All fixed income is Canadian. Equities are split one-third each between the S&P/TSX, S&P 500 and MSCI EAFE in Canadian dollars.
    • It is important to note that this analysis is based solely upon an examination of asset mix and that portfolios with reduced diversification will experience greater volatility.
  • These numbers also represent past returns. With low inflation and low fixed income returns, we would expect future returns to be lower than those in the past.

Our disclaimer: The asset mix model portfolios depicted are samples only. We recommend that you consult with a professional before determining a suitable asset mix for your investments.

Two Graphs in One

  • The blue line represents the compounded growth of $100 (right axis).
  • The bar chart shows the annual return each year (left axis).
  • Additional statistics are shown on the top left of each chart.
    • The standard deviation is the average measure of the volatility each target portfolio could have experienced over the time horizon.
  • Compare how the compound average annual rate of return and standard deviation change as the percentage held in equities changes.

Conservative Income Portfolio

Observe how this conservative income portfolio has fared over the long-term. Click the button below to start.

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Conservative Balanced Portfolio

Observe how this conservative balanced portfolio has fared over the long-term. Click the button below to start.

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Balanced Portfolio

Observe how this balanced portfolio has fared over the long-term. Click the button below to start.

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Growth Balanced Portfolio

Observe how this growth balanced portfolio has fared over the long-term. Click the button below to start.

 

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All-Equity Portfolio

Observe how this all-equity portfolio has fared over the long-term. Click the button below to start.

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More on Asset Mix

Are you convinced that asset mix matters? Are you determined to stay the course and ride it out through good times or bad? Or, do you find yourself straying and winding up with another asset mix? You’re not the first, nor will you be the last investor to do so. In the “More…” section below are three lessons that could improve your performance as an investor.