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Fully Invested Portfolios vs. Balanced Funds

By beled | April 17, 2014

Comments from David Leslie:

Leslie comments, ‘I have been asked many times for my opinion on fully invested portfolios versus balanced funds and the question is always ‘Which is the better investment option?’

‘I should start by saying that there is a common misperception that cash is a low risk alternative in an investment portfolio.  In reality, cash is arguably the highest risk option you could possibly choose, since you are guaranteed to lose money relative to inflation.  This is not meant to imply that investing in equities is without risk, but rather than equity investment can offer superior returns within acceptable risk parameters.  The caveat, of course, lies in who is managing your money!

At Belmont, we limit risk in several ways.  Firstly, we only invest in the best quality shares and we do this by limiting the universe of equities from which we choose.  In South Africa, we stick to the Top 40 and offshore, we select from the FT Global 500.  To maintain our overlay of quality, we opt for companies with track records of top quality management, stable earnings and good growth prospects.

‘Secondly, we look for value.  Whilst this may seem obvious, we are careful not to overpay, even for quality stocks.  We actively seek quality shares that are ‘out of vogue’ for one or other reason and consequently under-priced.

‘And thirdly, we always take a long term view.  Rushing in and out of markets is a recipe for disaster, but taking time to consider your investments and then adopting a long term view is a much surer path to wealth creation.

‘Based on this logic, our philosophy is that fully invested portfolios offer better performance than balanced funds (which, by definition, hold a portion in cash and bonds).  This is borne out by the historical underperformance of balanced funds when measured against pure equity investments.’

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