Balancing (& Rebalancing) For Success

By Robin Bowerman | More Articles by Robin Bowerman

How has your investment portfolio performed over the past 10 years since the onset of the global financial crisis (GFC)?

If your portfolio had been carefully and appropriately diversified in at least the main asset classes – Australian shares, international shares, fixed income, property and cash – throughout this time, you have put yourself in a strong position for investment success.

And you should have been particularly well-placed for investment success if you had also periodically rebalanced your portfolio back to its strategic or target asset allocation, and, if possible, reinvested income and kept adding new capital.

Such an all-terrain, diversified portfolio should have readily handled and smoothed the ride from the pre-GFC sharemarket highs, down to the GFC market lows and up the other side with the subsequent recovery.

As Smart Investing recently discussed, super fund researcher SuperRatings calculates that the median balanced big super fund was more than 50 per cent above its pre-GFC peak (excluding contributions) at June this year. This is despite losing a quarter of its value in the depths of the GFC.

On the tenth anniversary of the GFC’s beginning, consider how the various asset classes have performed over that decade.

A recent Vanguard report, The power of perspective, highlights how different asset classes have been the highest performers in different years. And the top-performing asset class in one year can be the following year’s also-ran.

The top-performing asset classes for each financial year since the beginning of the GFC are: international bonds – hedged (2007-08 and 2008-09), international listed property (2009-10), international shares – hedged (2010-11), Australian bonds (2011-12), international shares (2012-13), US shares (2013-14 and 2014-15), Australian listed property (2015-16) and international shares – hedged (2016-17).

This roundabout of winning asset classes underlines the rewards of having an appropriately-diversified portfolio and a disciplined approach to rebalancing while avoiding the traps of chasing next year’s winners and trying to time the markets.

Imagine, for instance, if you had moved out of international shares (hedged) because of their declining returns in 2014-15 and 2015-16. You would have missed out on an 18.9 per cent return in 2016-17.

Robin Bowerman

About Robin Bowerman

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

View more articles by Robin Bowerman →