Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Playing From a Full Set

By Paul Gleeson BBS, QFA, CFP

This article also appears in the Celtic Connection, where Paul is a regular contributor.

As the weather starts to improve
and we see a nice stretch in the evenings, I for one will be blowing the dust off my golf clubs to get my game going again after the winter hibernation.

I remember around this time last year playing a game with some friends and one of them had forgotten his sand wedge. (For the non-golfers out there, this is a club that is used to play your shot out of the sand bunkers – for the most part). So my friend used his pitching wedge instead for the round anytime he was in a bunker. Golf is a difficult enough sport in the first place and doesn’t need to be made harder by not having a full set of clubs at your disposal.

This got me thinking recently about investing, and in particular, investing over the past 10 years. This is a hard enough activity to do successfully so it is very important that we all have a full set of “investment clubs” at our disposal. There is no right or wrong way to invest money and it is beyond the scope of this piece to fully delve into the many different investment strategies that one can employ.

However, I do want to examine two different investment approaches. The first is a traditional strategy and the second is a more sophisticated approach that I use for myself and my clients.

The Traditional Approach:

The traditional approach is to invest 60% to 80% of a portfolio in equities with the balance in fixed income investments such as bonds and GIC’s. This would commonly be referred to as “balanced”. In my opinion, there is nothing balanced about having 60% or higher invested in one asset class.

Coming back to our golfing analogy, I would say this investment strategy is the equivalent of trying to play a round of golf with only two clubs – i.e. trying to navigate the investment markets by using only two asset classes (bonds and equities). This approach can work, but based on what I have seen personally, I would say that for the most part, it has not delivered good results for investors over the past 10 years.

A More Sophisticated Approach

It is widely acknowledged in the investment community that the asset mix of an investment portfolio will account for 80% to 90% of the total return and that the individual investment within a certain asset class will only account for 10% to 20% of the return. So for example, rather than focusing my time and energy on which gold stock I will buy, I would instead focus much of my time on what percentage of my total portfolio I want to expose to gold. This decision will have a greater impact on my total return than which gold company I buy.

The investment approach that I use for my clients focuses on building a portfolio with a much broader asset mix than the traditional approach of just equities and bonds. So in addition, I would also include real estate, mortgages, alternative strategies such as private equity investments, hedge funds and commodities as well as high yield bonds and preferred shares. Instead of having just two golf clubs in my “investment bag”, I will have closer to ten. The following is a visual comparison of the two approaches:

I don’t have any crystal balls, so I cannot tell you what markets are going to do and when they are going to do it. But what I can tell you is that a wider asset mix will help you achieve a better risk-adjusted return, especially in this turbulent investment climate. Building long-term wealth is as much about protecting it in turbulent times as it is about growing it in good times, and with debt issues in both the U.S. and Europe, it is possible markets could remain volatile for the next 4 to 6 years.

I believe this more sophisticated strategy will continue to offer a higher level of protection to investors than the traditional approach. The next time you receive your investment statement, look closely at your asset mix and consider the number of clubs or asset classes you are using.

What is your take on asset allocation?  What other investments do you think are important?  Let us know in the comments below!