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Panic. (Photos.com)
Panic. (Photos.com)

Preet Banerjee

Are you an emotional investor? Consider a turn-key portfolio fund Add to ...

A lot of investors have backed completely out of the stock markets for fear of heightened volatility. But reacting with emotion is the last thing an investor should do.

Many studies have shown that an inability to stick to an investment strategy during the bad times is a bigger drag on portfolio performance than the dreaded Management Expense Ratio. That goes for both active and passive strategies.

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Studies of fund flows between equity and fixed income funds show that investors are constantly one step behind the game. They wait for stocks to do well before shifting money to stocks. After stocks have faired poorly, they sell them and pile into fixed income.

Buy low, sell high. It sounds easy to do in theory, but practice indicates it’s much easier to do the opposite.

For investors who have trouble keeping the emotion out of their investments, portfolio funds offer a simple, turn-key solution. Portfolio funds are managed collections of underlying funds designed to follow the principles of prudent portfolio construction: they are diversified, they allocate assets across equities and fixed income around the world, and they rebalance automatically.

The benefit of systematic rebalancing is that it keeps the portfolio aligned with its intended risk profile while helping to take the emotion out of rebalancing.

In sideways, choppy markets, systematic rebalancing can also help to eke out gains in your portfolio. While we’ve seen correlations between asset classes approach one during severe market events, correlations vary over time. It’s possible to have a 50/50 portfolio of stocks and bonds generate a positive return, even though they individually trend sideways over time.

Consider this chart:

 

Start

Q1

Q2

Q3

Q4

Stock fund

100.00

110.00

107.00

98.00

100.00

Bond fund

100.00

95.00

99.00

102.00

100.00

50/50 Portfolio

100.00

102.50

103.26

100.48

100.52

Individually, the asset classes of stocks and bonds both generated flat returns over the entire time series, yet they were volatile along the way. Rebalancing nonetheless helped to capture a positive return for the portfolio.

If you’re having trouble rebalancing your portfolio yourself, consider a turn-key portfolio fund. They are available with active or passive investment management and can help prevent reduce the emotional interference your brain might run on your investments. By taking it partly out of your hands.

Follow on Twitter: @preetbanerjee

 

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