Is Your Portfolio Unbalanced? | Money for The Rest of Us

Why most conventional portfolios make huge and often unintended bets on the stock market. How role-based investing can lead to a more balanced portfolio.

Orchard of trees covered in white blossoms, blue sky above. Caption says "Unbalanced Portfolios." Money For the Rest of Us. — Photo by Mangrove Mike

In this episode you’ll learn:

Why asset class returns and volatility are driven by changing expectations.
How most investors are making a huge bet in stocks even though they might not be aware of it.
The benefit and challenges of holding assets that perform well during various economic regimes.
Why investing in commodity futures is so challenging.

Episode Chronology

[0:57] David asks his question for this episode, “Is your portfolio unbalanced?”
[6:39] Changing expectations lead to market volatility
[14:12] Each market segment has inherent biases in various economic environments
[18:40] Don’t be in the unenviable position of not receiving returns on your portfolio
[23:07] Why David DOES believe you can identify shifts in the financial market
[25:38] Historical vs. current cash return data
[28:23] The tools David used to evaluate potential returns
[30:14] The historical length of commodity bear and bull markets.
[33:36] David’s solution to modern-day investment portfolio challenges

Show Notes

Balanced Asset Allocation: How To Profit In Any Economic Climate by Alex Shahidi

Principles: Life and Work by Ray Dalio

Episode Sponsors

Proper Cloth

Become a Better Investor With Our Investing Checklist

Become a Better Investor With Our Investing Checklist

Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Episode Summary

Having a balanced portfolio is a key to financial success. It offers a secure future and provides a level of security to your day-to-day lifestyle. On this episode of Money For the Rest of Us, David considers the question, “Is your portfolio unbalanced?” A new member of Money For the Rest of Us Plus introduced him to the book Balanced Asset Allocation by Alex Shahidi and it was the inspiration behind this podcast episode.

Four main reasons behind market volatility

Shahidi writes, “The ultimate goal is to capture excess returns over time, with as little risk as possible. The more volatile the return, the greater the risk of capital loss.” David explains that there are often unintended consequences of single-track investment strategies and that having too much of your portfolio invested in one asset class is not a good strategy.

Here are three main reasons as to why the market is volatile:
A shift in the economic environment
Shifting risk appetites
A shift in expectations of future cash rates (future path of short-term interest rates)

Every market segment has inherent biases in various economic environments

The key to avoiding market volatility is to hold multiple asset classes. These various types of assets will allow you to benefit in any type of market. For example, slowing economic growth is better for traditional bonds, while accelerating growth is better for stocks. TIPS and commodities do better when inflation is increasing. Even though most investors have a heavy bet on economic growth because of their stock-heavy portfolio, the arguments outlined in Shahidi’s book encourage otherwise.

Don’t be in the unenviable position of not receiving returns on your portfolio

The single most important takeaway from this episode of Money For the Rest of Us is this: Don’t rely on any single asset class to provide financial returns. Shahidi writes, “Own asset classes that are as volatile as stocks, but that perform better in different economic regimes.” Shahidi recommends 30% in long-term Treasury inflation-protected securities (TIPS), 20% in commodities, 30% in long-term bonds, and 20% in stocks. Collectively, this type of portfolio could generate excess returns above cash, although many investors might find the volatility of the underlying segments unsettling.

Why David DOES believe you can identify shifts in the market

Investing will never be 100% predictable, it’s the nature of the game. But David does believe, contrary to what Shahidi writes in his book, that you CAN identify shifts in the market. Before a shift occurs there are often red flags that can be identified and researched, even if it takes a dedication to objectively watching market conditions.