Five balanced portfolio mistakes

1. Overreliance on one scenario

Lots of investors build a portfolio, often based on past performance, which is all leaning the same way and where there isn’t a sufficient number of elements doing different things. Concentration in particular themes or sectors and overlaps in fund style are a common by-product of just choosing what has done well in the past.

Investors building resilient portfolios should be more pragmatic, aware there will always be risks that their view is wrong on either on the upside or the downside and by not aligning themselves too much with one outcome.

2. Not controlling volatility

It’s easy to make money when markets are rising, but what about when they fall? In difficult or choppy markets, the spread of different assets you own becomes more important. Certain thematic areas or actively managed strategies might come into their own, even though they have languished beforehand.

Limiting the downside and preserving capital can help you take advantage of the next upswing and can be instrumental in producing strong long term returns. Having various different elements that are less likely to move up and down in tandem can protect from market volatility and, if well-chosen, can still deliver strong performance.

If you are drawing from your investments to provide income, volatility can be even more damaging. It is not just the long-term average return that matters but the sequence of returns. Negative returns earlier on can have a particularly detrimental impact on the value of a pot, even if they are then followed by good returns. A portfolio well-diversified across various assets to smooth returns can reduce the likelihood of a poorer outcome.

3. Not keeping an eye on cost

Cost isn’t everything, and focusing on that alone won’t guarantee good returns. However, they are an important element and one thing investors can control to help maximise returns. In every element of a portfolio, it’s important to question whether you could get the same or similar exposure cheaper.

4. Not harnessing all asset classes

Diversification traditionally meant a split between equities and bonds. Yet this simple but one-dimensional approach won’t protect you from some risks that are out there. The usual ‘self-balancing’ of a traditional equity and bond portfolio could be broken, largely thanks to the trajectory of interest rates, which have been cut to close to zero. In particular, a portfolio of interest rate sensitive bonds and growth-style equities would likely falter significantly in some economic scenarios.

To provide a well-rounded portfolio, investors should consider carefully selected investments in areas such as infrastructure, property and alternative strategies to complement core positions and provide opportunities that don’t exist in the realm of traditional investments.

5. Using only active or only passive funds

Investors should be pragmatic towards the active versus passive debate and should consider utilising the entire spectrum of active and passive funds.

We continue to like passive funds for low-cost core exposure to core markets and tend to prefer active for more specialist areas. Uncovering stocks or areas that the wider market doesn’t fully appreciate is where active management works best and cost, although important, maybe a second-order consideration here. Often more pivotal to returns is the expertise of the manager and their team in their respective asset class.

In areas such as high yield bonds and emerging market debt, we believe there are active managers that can add considerable value in terms of maximising returns and managing risk versus a passive option. There are also areas that can help diversify but are out of reach of passive products such as physical infrastructure.

Chris Ainscough is the manager of Charles Stanley’s range of multi-asset funds.

Charles Stanley Funds