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Market Perspective
Boring Can Be Beautiful
 by Ernie Ankrim
Director of Portfolio Research
Frank Russell Company
February 14, 2001
In the raging bull market of recent years, all too many investors pursued aggressive, new-fangled investment ideas, and shunned any plain and simple, common sense strategy. It seemed as if the only investment they were suspicious of was a boring one.
For those who regard investing as a pastime, this way of looking at the market may not be all bad. But for those who are relying on their investments to finance a more secure, comfortable retirement; college education for their kids; a down payment on a new house; or other down-to-earth long-term goals, the idea that "boring is bad" can be a trap.
The middle of the road isn't such a bad place to be.
When one asset class does quite well, like equities did in 1999, who wants to be in a diversified portfolio that, by design, does not provide undiluted exposure to that one asset class? For that matter, what investor in 1999 didn't entertain the idea — if only for a second — of betting all their money on technology stocks?
In 2000, however, it became apparent that the middle of the road isn't such a bad place to be. With equities on the downswing and bonds on the upswing, portfolios diversified between the two tended to perform much better than those heavily or exclusively weighted in equities. It's precisely when one asset class goes into an extended downturn that a diversified, balanced approach really shows its mettle. But it's easy to forget that lesson when times are good.
The Benefits of Balance
Overall, investors should expect a portfolio diversified among asset classes and styles to offer three characteristics:
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- Returns that are somewhere between all-fixed-income and all-equity averages.
- Risk that's somewhere between all-fixed-income and all-equity averages.
- An avoidance of meltdowns that occur in portfolios with concentrated investments.
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The goal in a balanced strategy is to have efficient asset allocations across a wide frontier of returns and risk factors, all based on how you expect them to perform over time. Of course, individual positions within a balanced portfolio will have their ups and downs. But in the long run, history suggests that efficient allocations will prevail.
Lesson Learned — Or Was It?
You might think that the hard lessons of 2000 would convince investors not to concentrate in one asset class or flock to the market's latest hotspot, yet some evidence suggests otherwise. According to figures from the Financial Research Council, over the past few months, a growing amount of assets have been flowing into fixed-income funds. There could be a variety of explanations for this, but unfortunately one reason is that not all investors learned their lesson in 2000. Many still don't appreciate the benefits of a diversified, long-term strategy that doesn't involve piling into whatever asset class is currently on an upswing.
The reality of balanced investing is that investors should adopt sensible, long-term strategies and have the conviction to tolerate whatever happens between now and then. This philosophy underpins Russell's approach to investing.
Balanced may be boring, but over the long run it can be beautiful indeed.
Copyright © Russell Investments Canada Limited 2001. All rights reserved. See 'Important Legal Information.' Date of first use: 02/13/01.
This is a publication of Russell Investments Canada Limited 2001. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada Limited. Frank Russell Company, a Washington, USA, corporation, operates through subsidiaries worldwide.
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