The average investor’s portfolio 60% stocks, 40% fixed income

What’s the purpose of your portfolio? Common responses include: “ensure we have enough money for retirement (or other future goal)”, “inheritance for children”, and “future giving to church and charities.”

THE LONG HAUL

Portfolios are usually long-term in nature. Lots can happen over time in markets, currencies, economies, etc. Portfolios must be built for the long-haul to balance investment return goals against acceptable risk.

Having a disciplined investment process and diversity in the portfolio so you “don’t have all your eggs in one basket”, are principles equally relevant whether a $500,000 personal or $5 billion institutional portfolio.

For example, the $316.7 billion (Mar. 31/17) Canada Pension Plan Fund states, “Our mandate is clear: to invest the assets of the CPP Fund with a view to achieving a maximum rate of return without undue risk of loss.” The $17.5 billion (Dec. 31/17) Alberta Heritage Fund states, “the key to sustainable (investment) performance is maintaining a diverse portfolio with a long-term focus, prudence, and investment discipline.”

Sure, you don’t have billions like a pension, but in an August 2015 column I shared how it’s possible for personal investors with moderate to large portfolios to “Invest like a pension.” Benefits typically include increased investment discipline, access to institutional investment management, lower fees, increased tax efficiency and greater transparency.

But there’s one notable difference between institutional and personal portfolios not mentioned in that column.

ONE KEY DIFFERENCE

The average retail investor working with an advisor has a mixture close to 60% stocks and 40% fixed income (bonds). (Russell Investments, 2016) Meanwhile, the average institutional portfolio has stocks and fixed income too, but also about 15% to 30% in real assets. Real assets are things like infrastructure, real estate and gold.

The goal of including real assets is to target long-term investment returns while reducing overall portfolio risk through this broader diversification.

Over the 44 years from 1972 to 2015 (BMG Inc. study) stocks were the top performing asset class for 7 years, bonds 6 years, cash 2 years – and among real assets – real estate (REITs) 17 years and gold 12 years. On the flipside, stocks were the bottom performing asset class for 8 years, bonds 4 years, cash 9 years – and for real assets – REITs 8 years and gold 15 years.

Investigate real assets and diversify like a pension.

Inquiry welcome at www.dereks.ca. Opinions are those of Derek Shevkenek and may not reflect those of BMO Nesbitt Burns Inc. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is a Member - Canadian Investor Protection Fund. Member of the Investment Industry Regulatory Organization of Canada.

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