The Power of a Balanced Portfolio

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We have experienced one of the most feared risks of stock investing: a sudden, steep collapse in prices over a short period of time triggered by an unanticipated event.

Except for the speed of this decline and the particular catalyst, it is no different from the 1973–1974, 2000–2002, or 2007–2009 market drops—a fact of stock investing life that should be part of every long-term investor’s expectations and built into every long-term portfolio structure. Trying to alter this reality, as active managers have attempted for decades, with embarrassing results, is a fool’s game. It’s a far better strategy to manage this inevitable risk using more reliable and practical techniques.

The best of these is the balanced portfolio.

The balanced portfolio is built on the principle that stock risk cannot be diversified away; it only can be either diluted by adding a lower-risk/lower-return asset to a portfolio or increased through leverage (borrowing), concentration (anti-diversification), market timing, or other means.

If you are uncomfortable with the kind of stock market risk we’ve experienced recently (or with even just the normal ups and downs) and you can meet your long-term goals with a lower expected return for your portfolio, your dilution tool of choice should be bonds.

Of course, now is probably not the best time to sell stocks to make an adjustment. That should have been done prior to the decline. If appropriate, talk with your relationship manager about adjusting your portfolio balance after stocks recover, and establish the new balance as your long-term policy.

A traditional balanced portfolio uses total market index funds as the basic tools to achieve whatever mix works best for you. Equius takes a more modern approach based on contemporary research. On the stock side, we balance the large growth stock concentration of stock market index funds (a result of their market cap weighting) with a larger allocation to small-company and value stocks.

This helped during the bursting of the dot-com “bubble” that started in 2000 but hurt portfolios during the global financial crisis. Small-cap and value stocks haven’t done as well in this decline either. However, after the first two major declines, large and small value stocks generated substantially higher returns over the subsequent 12 months.

We also balance the stock allocation with non-U.S. stocks, the benefit of which was outlined in the June 2019 issue of Asset Class. On the bond side, we diversify among global, short-term, high-quality bonds rather than funds that target longer maturities and/or lower-quality bonds.

To understand how difficult it is to maintain your composure and your portfolio mix during times like this, I’m reminded of an article written by investment legend Peter Bernstein in January 2002 in which he advocated strongly for establishing and maintaining a traditional 60/40 balanced portfolio.** In the midst of the dot-com crash, however, he changed his mind as stocks were falling and began advocating for a form of market timing. I wrote about this in the March 2003 issue of Asset Class. Even legends get wobbly under pressure.

Panics and crashes elicit very strong emotions. It’s easy to allow yourself to become very pessimistic and think in terms of the worst-case scenario and then act in that way. Balance yourself and your portfolio instead. And have faith in our dynamic economy.


*Proxies are the S&P 500, Dimensional US Large Cap Value Portfolio, and Dimensional US Small Cap Value Portfolio.

** The 60/40 Solution, Bloomberg Personal Finance. 

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2023 Equius Partners, Inc.

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