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Inattentional Blindness.


Psychologists use the phrase inattentional blindness to describe that ‘we don’t notice things when we don’t pay attention’. It’s difficult if not impossible to be aware of everything going on around us. (Ben Sherman, ‘The Survivors Club’).

Are Individual Investors inattentive and blind today?

Adverse macro events persist yet stock markets have doubled in two years. Do the fundamentals support and will they sustain current heights?

Where does the investor look for answers?

One of the most frequently referred to measurements of valuation(s) is the P/E ratio. Price to Earnings ratio.

But here’s the problem.

Some experts measure P/E as the average of ‘actual’ earnings over the last 10 years. Other experts measure P/E based on an ‘estimate’ of future earnings.

Who is right?

We don’t know. Probably neither will be exactly right.

What are investors to do?

Nearly always, the answer is between the two extremes.

Rather than make a bet on one or the other valuation and therefore outcome, the safe middle ground is the logical choice. Don’t make a bet. There is significant and compelling evidence right before our eyes … if we pay attention.

According to Mercer Investment Consulting, the average 5-year balanced fund return was 4.6% to year-end. According to RBC Dexia, the 10-year balanced fund average return was 5.9%, the 20-year average was 9.6% and the 46-year average was 8.6%.

In both surveys, the balanced fund composition has changed only slightly over the years but it has always been somewhere between a 40% stock / 60% bond mix to a 60% stock / 40% bond mix.

RBC Dexia Balanced fund returns

 
The average balanced fund return always approaches 8 to 9% or so over time. But in any one year … it’s basically a bet. (See chart). Further, a balanced fund has had only 8 negative years in 46. The range is from 23.6% (highest in 1985) to -13.7% (lowest in 2008). And, the 5-year and 10-year rolling returns have never had a negative year.

It’s tried and true. It works every time over time. And it’s simple. It is always a good time, and never a bad time to have a balanced portfolio. Balance or rebalance your portfolio. Now more than ever.

Are Individual investors paying attention?

Next time?

248 stocks. 703 mutual funds.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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8 Comments Post a comment
  1. Maple #

    Like the post. Very convincing, simple but winning strategy. Regularly investing in any market in balanced ETF portfolio, maintaining asset allocation and rebalancing as required. Love it.

    Like

    June 12, 2012
  2. Mickey #

    Good post. And good blog! For most people, a low-cost balanced fund (MER < 1.5%, preferably 1%) is the way to go.

    Like

    April 30, 2011

Trackbacks & Pingbacks

  1. Balanced fund returns (an update). | Institutional Investing for Individual Investors
  2. Why Stock Markets Correct* « Institutional Investing for Individual Investors
  3. PIAC composite Asset Allocation – updated. « Institutional Investing for Individual Investors
  4. Controversy is Uncomfortable. « Institutional Investing for Individual Investors

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