Benefits and challenges of balanced investing

Despite some lacklustre performance in recent years, a balanced investment portfolio continues to provide benefits to many investors.

In a recent interview, Michael Keaveney, vice-president of managed solutions with CIBC Asset Management, discussed those benefits, which included the traditional one: weathering volatile markets.

“The implicit appeal of the balanced approach is that the bonds are expected to provide the ballast to mitigate overall downside in periods where equity markets are suffering,” Keaveney said.

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But during the tumultuous market conditions of 2022, when both bond and equity markets saw simultaneous declines, the traditional resilience of balanced portfolios was put to the test. 

Unlike the 2008 financial crisis, when bonds provided a cushion against falling stock prices, 2022 “was different,” Keaveney noted. “Bonds faltered in a historic way at the same time stocks were down.”

A steep rate-hiking cycle that destabilized bond markets also enhanced the appeal of alternative investment vehicles like GICs and high-interest savings accounts, offering higher yields and attracting long-term investors away from balanced portfolios. 

Keaveney said this year and the previous one have marked a positive shift.

“Balanced investors have had a favourable environment over the course of 2023 and so far this year,” he said.

The cessation of rate hikes and a recovery in equity markets have led to attractive returns for diversified portfolios. Additionally, some central banks, including the Bank of Canada, have initiated rate cuts, which Keaveney said would be favourable for the bond component of balanced portfolios.

Another benefit of balanced portfolios is their tax efficiency, he noted. In non-registered accounts, while interest income from instruments like GICs is fully taxable, balanced portfolios can offer a mix of capital gains and eligible dividends, which have favourable tax treatment in comparison.

However, balanced investors must navigate behavioural challenges, such as the fear of missing out (FOMO) on higher returns from the latest high-performing asset classes. Keaveney said having a balanced approach will “almost certainly mean that your returns over any particular period will lag the flavour-of-the moment investment.”

To combat behavioural biases, he stressed the importance of clear investment goals and objectives, as well as ongoing advice to keep investors focused on long-term goals.

Keaveney also pointed out the challenge of navigating the multiple asset classes that could form part of a balanced portfolio, including private and alternative investments. A successful balanced portfolio will require additional skills and expertise, he said.

“Asset classes are like the potential ingredients in a recipe,” he said. “You can have the freshest ingredients in the world, but how you put them together matters.”

Finally, balanced funds have an ability to narrow the “behaviour gap” — the difference between investment returns (time-weighted) and the actual returns realized by investors (money-weighted). Studies by Morningstar indicate that balanced funds typically show a smaller behaviour gap, suggesting they effectively support positive investor behaviour.

“The balanced wrapper shields the investor from noticing individual asset classes that have underperformed the others over short periods, and they’re more likely to stay invested,” he said. 

For investors with low to medium risk tolerance and long-term goals, balanced portfolios continue to hold significant appeal.

“Most investors are likely to be well served by a balanced solution for at least some portion of their investment goals,” Keaveney said.

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.