What "Balance" Really Means To Investors

Informed Canadian Investor

When the investment industry mentions the term ‘balanced portfolio’, many investors interpret it as a low risk approach to investing. Yet, many people don't know what balance they have and whether it's the right balance for them.
They trust the balance they receive, and are unsure how to confirm if it is the rightz balance for them. Thus, when the balance is inappropriate, clients become disappointed, which is a disservice to the client and clients as a whole. It also strains the integrity of the industry.
In this episode, I will share with you the basics of the balance in a portfolio. The next few episodes will expand this topic further.
The word “balance” means the client portfolio has a mix of fixed income and equity. These terms are industry jargon, which makes it difficult for clients to understand. So, in simpler terms, balance typically means there is a mix of bonds and stocks in the client portfolio.
I will also share another simpler term for us here and that is the word ‘return’. You as a client think in terms of ‘return’ while the industry uses terms like gains, yields, and interest. While industry terms are more accurate, they interfere with the client’s understanding. For my discussion in this episode and this podcast, I’ll use the term ‘return’ as gains, yields and interest all contribute to your return.
When you have a long period to invest, stocks are more suitable. When you have a short period to invest, bonds are more suitable.
Where you fit between these two ends is influenced by your risk tolerance, which I will discuss in 2 episodes from now, where you are in your investor life stage (like how close you are to retirement), and other factors, which I’ll discuss indirectly throughout this podcast.
At this moment, you want to know why the industry leans toward stocks or bonds as this helps you understand the balance given to you.
When you have a long time to invest, you most likely prefer to have more return on your investments. Thus, you want to invest in something that gives you more return and you will accept the rollercoaster ride that gets you there. This is what you get from stocks.
When you have a short time to invest, you most likely prefer to have more stable investments that give you a smaller return. In other words, you want to invest in something that gives you principal protection and a smaller return.
You get principal protection from individual GICs and individual bonds you hold to term with caveats your advisor will explain to you. For example, if you sell a bond before it matures, like indirectly through a mutual fund, the principal protection begins to decline.
I'll use an everyday term to explain this. It is like supply and demand. When you need to sell a bond, the demand might be high or low, which means you might sell it at a discount.
Just so you know, when you start thinking you need to liquidate some assets in the next few years, let your advisor know because how your advisor invests for you might change.
As a client, you want to know the value set aside for short-term investing and you want to know whether you get principal protection or not.
For the longer time frames, you want to know the weight of stocks versus bonds in your portfolio. This is a good topic for discussion with your advisor.
With regards to stocks, I will share one idea with you. Some people believe a larger roller coaster delivers the largest return. In truth, there is a sweet spot between the kiddie rides and the largest roller coaster. It’s broad though not as broad as you might think. It also ebbs and flows though not as much as you might think. You will get a better feel for this through some of the other episodes.
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