Is the Traditional Balanced Portfolio Dead?

Up until now, the management of your retirement investment portfolio was a pretty simple task. Invest +/- 60% in equities and the balance in bonds with a smattering of property and a dash of cash and then rebalance your portfolio once a year. This was the default balanced portfolio advice given by many asset managers and financial advisors and was probably not way off the mark.

But times are a changing and international advice trends are showing that this one shoe fits all type of advice is no longer appropriate, but also can be downright dangerous.

The current macroeconomic world of an ultra-low interest rate environment, bonds and fixed income are not yielding much beyond about 1,5% yield. This is not enough to generate an acceptable yield to fund retirement income needs over the long term. Professor Jeremy Siegel from University of Pennsylvania’s Wharton School is encouraging investors investor’s to consider alternatives to the traditional 60% stock, 40% bond allocation. Click to view.

For South African investors the dilemma is slightly different. The JSE has delivered only 6,1% per annum (3,8% per annum if you exclude Naspers) over the last 5 years. This asset class is supposed to be the growth engine that drives returns to assist your portfolio in your preparation for retirement. For a South African investor the appropriate asset mix for a portfolio depends very much on your time horizon for your investment. Seeking qualified advice is of utmost importance.

Another factor to consider, is the demographic issue that longevity for people living in a western middle class environment is on the increase. Life expectancy in the western world is currently at about 80 and rising. This means that if you quit working at 60, you must have the savings to support you, your medical costs and your lifestyle, for 20 plus years. That is no mean feat in today’s environment of low investment savings and inflation. People are living longer and wanting to enjoy their sunset years to a greater degree, but it does come at a considerable cost.

There is no magic formula as to what is the optimum asset mix for a portfolio. Just as the old 60/40 allocation was just a broad starting point guideline, so opinion is today divided as to what the optimal portfolio allocation is. There is consensus that an investor should have a higher exposure to stocks than before. Financial stocks or equities are the only real investments that has stood the test of time through various market cycles and delivered above inflationary returns. The optimal asset allocation would depend on the age of the investors as well as their physiological disposition to risk. It is no use having an optimal asset allocation that works on an intellectual level, but if and when the markets fall, investors cannot sleep at night.

Taking professional advice from an advisor that is not just a good salesman, but that can also educate you in what the optimal asset allocation is for your stage of life and circumstances, is of critical importance. This advisor should be able to walk the road with you and relate to you and your spouse and how you view your investments. He or she should be allowed the scope and ambit to structure and advise on your whole portfolio, not just the odd policy or two. They should be skilled enough to think out of the box and design a portfolio that is unique to your life goals, means and financial circumstances. If you have such an advisor, hold on to them and treat them well. If not, look out for one and then hold on to them for dear life. Your long-term financial wellbeing may very well depend on it. We would encourage you to book an appointment with one of the Activ8 professional advisors.