Our focus turns to the reason why it makes sense to be invested in a multi-asset class portfolio as opposed to only one asset class over time. It is only human for investors to sometimes feel that investing in one particular asset class will be to their advantage, as opposed to the long-term and balanced investment strategy recommended by your financial advisor. A balanced approach to investments means that there are almost always one or more laggards in a portfolio in combination with a couple of shinning stars. It is also quite common for human beings to want to pursue the recent winning investment only to discover, after a few months, that the previous loser has moved on to be the winner again. This psychological bias is referred to as recency bias and is really like a dog chasing its own tail.

Current environment

We are currently in a higher interest rate cycle and expectations are that rates will be raised for the foreseeable future. Such conditions normally prompt investors to conclude that fixed interest investments offer a superior investment opportunity as opposed to a multi asset class. This thinking is anchored on the idea that stable interest-bearing returns makes more sense than exposure to numerous asset classes where some assets are performing, and others are not.  To test this logic, we constructed a high equity balanced portfolio and a low equity balanced portfolio consisting of all available listed asset classes. In other words, we assumed exposure to the different markets without managing the exposure actively like a manager would be doing. The low equity portfolio consists of the ALSI JSE Top 40 (20%), MSCI World Index (ZAR) (20%), All Bond Index (40%) and Stefi Money Market Index (20%). The high equity portfolio consists out of the ALSI JSE Top 40 (40%), MSCI World Index (ZAR) (35%), All Bond Index (15%) and Stefi Money Market Index (5%).

The below illustrates the returns of a low equity balanced and a high equity balanced portfolio in relation to a money market investment over different time periods and considers more than just the potential returns of each option. The comparison includes key factors like tax, cost, and the effect of inflation over numerous timeframes. An effective tax rate of 20% were used to calculate the tax effect on interest earned in all portfolios and no rebates were included in the calculation. The fee effect calculation was based on a passive fixed investment management fee structure and omits any other fees.  We assumed the investment was a unit trust investment and not accessed through any of the retirement products available. Last mentioned is only relevant from a tax point of view but fees and the effect of inflation is relevant to any investment despite the product used to access it.

Mindset

It is evident from the above comparison that a multi asset class approach, whether higher equity or low equity, adds value when adjusted for tax, costs, and inflation over 3-, 5- and 10-year time frames. It is also clear that cash is not a viable investment strategy as it barely delivers a real return over time. Cash should always form part of an investment strategy but is no investment strategy. It is important to note that the better outcomes produced by the two balanced portfolios was not based on only one specific asset class, but the desired result were produced by a combination of asset classes. The key point is that a balanced investment approach has always made more sense from a performance, after inflation and tax point of view.

Keep in mind that a balanced approach will not deliver the desired performance every single month or quarter because of the variable nature of equities, property, bonds, and commodities. Ironically, variability is the very ingredient needed for an investment portfolio to prosper over the long term. The lack of variability, or risk, is a guarantee to go nowhere, slowly. An investment process that is built on solid ground provides for more than one eventuality and employs different vehicles in a balanced way to achieve its investment objectives. That is what we (you and I) are invested in.