It’s more important to have an investment portfolio you can live with through stock market ups and downs than to tweak your holdings for strong performance.
But the cost of a comfortable investing experience needs to be explored, especially with bond yields at such low levels. Invest conservatively by all means, but recognize that your returns will be lower and that you may need to either save longer or retire later.
A clear illustration of the comparative returns of conservative and aggressive investing can be found in a recent National Bank Financial update of its five model exchange-traded fund portfolios. A quick recap:
- The income portfolio (23 per cent equity, 68 per cent bonds, 5 per cent cash, 5 per cent alternatives): The annualized return since Dec. 30, 2010, was 4.6 per cent and the maximum drawdown (worst decline) was 15.2 per cent. (Asset percentages may not add up to 100 because of rounding.)
- The conservative portfolio (37 per cent equity, 53 per cent fixed income, 5 per cent cash and 5 per cent alternatives): The annualized return since Dec. 30, 2010, was 5.7 per cent and the maximum drawdown was 17.8 per cent.
- The balanced portfolio (48 per cent equity, 38 per cent fixed income, 5 per cent cash and 10 per cent alternatives): The annualized return since Dec. 30, 2010, was 6.4 per cent and the maximum drawdown was 20.5 per cent.
- The growth portfolio (57 per cent equity, 28 per cent fixed income, 5 per cent cash and 10 per cent alternatives): The annualized return since Dec. 30, 2010, was 8.2 per cent and the maximum drawdown was 24.1 per cent.
- The maximum growth portfolio (67 per cent equity, 14 per cent fixed income, 5 per cent cash and 15 per cent alternatives): The annualized return since Dec. 30, 2010, was 7.6 per cent and the maximum drawdown was 29.1 per cent.
These portfolios illustrate the ladder of risk an investor must consider in building portfolios. You make less with a conservative approach, but lose less in down markets. It’s a package deal that makes sense for cautious investors who recognize that they’ll need at least some exposure to the growth available from stocks.
The notable exception here is the maximum growth portfolio, which performed worse than the less aggressive growth portfolio but also posted a worse maximum drawdown. This suggests there’s a point of diminishing gains when you reach a certain level of investing risk.
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