- Balance is about managing risk, not avoiding it
- Peak-to-trough losses are diluted
Balanced investors aren’t risk averse. To pursue this type of strategy, you ought to be accepting of the idea that your portfolio might fall 22 per cent in value according to our model. That was the worst peak-to-trough fall experienced drawing on data going back to 1978 and it occurred in the early-2000s bear market that followed the dotcom bust.
But being ‘balanced’ isn’t about hiding from the risks of such bad spells, it is about having an asset allocation that’s realistic about their possibility and that gives a smoothed-out rate of return that offers plenty of upside to compensate for the risk you’re taking. On the whole, it should be less volatile than more aggressive investing strategies and a real rate of return (ie after inflation) of around 7 per cent a year isn’t unrealistic.