Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 166

Investing is a balancing act

Balance is something we aspire to in many parts of our lives, be it work and family time, diet or exercise. Likewise, as the past 20 years has shown us, a balanced approach to investing can help navigate turbulent market times.

A strong body of research (including the 2013 Vanguard paper, The global case for strategic asset allocation) shows that the most important decision any investor makes is setting their asset allocation. However, it is almost impossible to pick which asset class will be next year’s winner, or in any subsequent year.

No discernible pattern of returns

When you plot the performance of all the major asset classes over the past 20 years, from domestic and international shares, domestic and international fixed income, domestic and global property and emerging markets, there is no discernible pattern.

It adds weight to the argument that past performance is not a reliable indicator of future returns. Indeed, when you plot the various asset classes in different colours, it looks more like a random patchwork quilt than a tool for making investment decisions.

This is not to say investment markets have not rewarded investors over the past two decades. If an investor had placed $10,000 in a broad Australian share index fund 20 years ago, it would have grown to around $51,480 by 2016. However, investors in international and domestic shares have had to endure a wild ride. Think of the ‘tech wreck’ of 2000 and 2008’s GFC. By comparison, investors in fixed income or cash have had a much smoother journey but have also missed out on the higher returns from other asset classes. A conservative Australian fixed income portfolio would have grown more sedately to $37,606 over the last 20 years.

In the real world, investors have to decide where on the risk spectrum, with cash and fixed income at the conservative end and shares at the higher end, they want to sit. Another lesson of the past 20 years is that market shocks appear from unforeseen sources, such as the US residential housing market and its influence on the GFC.

Tolerance for risk in asset allocation

Investors need to clearly understand how much risk they can tolerate before deciding which assets to allocate money to. Setting an asset allocation is the first decision, but sticking to it is another thing entirely.

Let’s take the example of three investors who each had the same balanced portfolio (50% growth assets and 50% fixed income) back in 2007. After the GFC hit, by February 2009, their respective portfolios had all fallen 18% in value.

One investor decides it’s all too much and switches the make-up of their portfolio entirely to cash to stop the losses. The second investor is also worried about the dramatic decline in the portfolio’s value and opts to switch to a more defensive asset allocation, shifting the portfolio entirely into fixed income. The third investor, while concerned by the global market gyrations, decides to stick with the 50/50 asset allocation of their balanced fund.

Not surprisingly, these changes resulted in quite different portfolio performances. If we move forward from February 2009 to February 2016, the portfolio of the investor who shifted to cash grew by 27%, the fixed income approach grew by a healthy 71% (helped by declining interest rates), but the portfolio of the investor who changed nothing and stayed the course with a 50/50 asset allocation grew by a 93% from the trough of the GFC.

The asset allocation decision has been shown to drive about 90% of a portfolio's performance, but it is not a once-off static decision. The asset allocation for a 30-year-old, given their investment time horizon, may well be more aggressive with growth assets than a 60-year-old approaching retirement may feel comfortable with. And as the 30-year-old moves through different life stages the asset allocation should rebalance.

The biggest lesson from the past 20 years is that we should expect different asset classes to regularly change positions on the annual performance rankings. The investor’s quest is keeping the balance right between the various asset classes to give the best chance of reaching an investment goal.

 

Robin Bowerman is Principal, Market Strategy and Communications at Vanguard Australia. This article is general information and does not consider the circumstances of any individual.

 

4 Comments
kevin
July 28, 2016

While there are many studies and opinions there is no doubt it is fear that rules.As Stephen says the biases (often) cannot be overcome.

The fear of losing one penny will always be greater than the joy of perhaps making 100 pounds.

Stephen Romic
July 28, 2016

Strategic Asset Allocation calls on investors to simply bear the portfolio risk under all market conditions, suggesting it’s the best way for investors to get their portfolios to their required destinations. I’m not so sure.

The problem with Strategic Asset Allocation is that it compels investors to overcome their innate behavioural biases - that the anxiety they feel under turbulent markets conditions must be accepted and that they must sit tight under the ‘assurance’ that it will all work out in the long run? The reality is that such behavioural biases often cannot be overcome and that the journey is perhaps every bit as important as the final destination.

Strategic Asset Allocation also gives no consideration to prevailing market conditions. It suggests that the SAA portfolio should be held under stable market conditions as well as turbulent market conditions. It is also not concerned if assets are expensive or cheap.
While Strategic Asset Allocation works well enough under normal market conditions, it is appropriate to question whether it suited to the current environment of increasing economic and capital market uncertainty. Greater focus on risk management is likely to reduce anxiety levels among investors and lead to better portfolio outcomes under such conditions.

PS The Brinson et al study is often misunderstood and misquoted.

Peter Thornhill
July 12, 2021

Fear is based on ignorance. Asking people to accept lower potential returns because of fear is the biggest failing of this industry. How about educating?

Warren Bird
July 13, 2021

Indeed Peter. The number of people who wanted their non-equity portfolios only in TD's because they were afraid of duration risk in bonds, but actually took a massive short duration position as a result and missed out on locking in decent interest rates when they were available, probably can't be numbered. Add to that the folk who are afraid of equity volatility for no good reason and get duped into thinking that because you don't revalue a rental property every day it's a 'safe' investment and you can't argue against the proposition that fear as a crippling investment process.

 

Leave a Comment:

RELATED ARTICLES

The perfect portfolio for the next decade

Diversification is not a free lunch

From our 2018 interview with Sir Michael Hintze, what's happened since?

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.