Are Balanced Funds broken?

The Gradidge Patch

I have been a believer in balanced funds for many years now. The simple balanced fund offers investors good exposure to growth assets, and lower volatility than the market. A well run balanced fund can outperform the equity market over time if the manager is able to get asset allocation right. Numerous balanced funds have long term track records with better than market returns so it possible. The rise of passive balanced funds has added an additional dimension to the market as investors can now access the benefits of balanced funds at a fraction of the cost that most active managers charge.

A few weeks back I sat for an annual portfolio review with a client. He has been a client for three years and like many investors, was concerned about lower than expected returns over the period. After the usual discussion around market conditions, he asked for a bit…

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A Dozen Things I’ve learned from Stanley Druckenmiller About Investing

25iq

“Stan may be the greatest moneymaking machine in history. He has Jim Roger’s analytical ability, George Soros’s trading ability, and the stomach of a riverboat gambler when it comes to placing his bets. His lack of volatility is unbelievable. I think he’s had something like five down quarters in 25 years and never a down year. The Quantum record from 1989 to 2000 is really his. The assets grew from $1 billion to $20 billion over that time and the performance never suffered. Soros’s record was made on a smaller amount of money at a time when there were fewer hedge funds to compete against.”  – Inside the House of Money

 

1. “I think David Tepper is awesome and if he’d take my money, I’d give him some but I think his fund is closed.”

I included this quote to make the point that even though a very…

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Behave and Save

Vestact - Money with a dash of funny

“By saving say 10% of your income you create a very handy buffer so the next time you have an emergency, instead of tapping into your savings (or worse into debt) you can just divert that buffer to the emergency expense. Another benefit is that you get used to living on less, so if the unthinkable happens where you no longer have a job, your savings last you that much longer. A more rosy alternative is that living on less gives you the freedom to change from the job that you are not too keen on?”


To market to market to buy a fat pig After a red start to the day the All Share finished the day in the green, up a little over 0.5%. Banks recovered from being down over 1.5% to finishing in the green for the day. Most of the gains though came through our dual…

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Complaining about Black Tax ain’t going to help anyone…

The Gradidge Patch

Black Tax is real. I know because I pay it. The hashtag #blacktax has a way of making an appearance on Twitter reasonably often. It is one of those topics that never seems too far away from the discussion, especially among Black South African millennials and Generation Xers.

However, as much as we South Africans like to think that we are somehow unique or special, the reality is that Black Tax is a global phenomenon known elsewhere as the ‘Sandwich Generation’.

What is Black Tax?

Black Tax (BT) refers to those extra expenses that Black people have primarily as a result of being Black in South Africa today. It specifically refers to the money that we have to spend on our extended families; in the form of a monthly stipend to multiple households, or paying for the education a number of children that are not ours, or having to contribute…

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The Losers Game – Extraordinary Investing For Ordinary Investors

Charles D. Ellis reads a book about tennis “Extraordinary tennis for ordinary players” and the book describes how tennis is two games in one, there is the professional game and the amateur game. Why do we say they are two games in one? Well the way professionals win is they outscore their opponent, they place the ball with great force and accuracy just outside their opponents reach meaning that professionals play to win the tennis games. When a professional loses a tennis game it means he was beaten by the winning player.

Contrast that to amateur tennis, they lose games. Amateurs try too hard, they hit the ball too far, they double fault when they serve, they hit the ball into the net, amateurs have lots and lots of unforced errors and so when you have two amateurs playing each other it’s not that one of them has beat the other, it’s that one of them has lost more points (put in reverse, the winning player had less errors compared to the loser) than the other and therefore loses the game.

Professionals score more points and win, whilst amateurs essentially defeat themselves and to Charlie’s great credit… he looks at this book about tennis and draws the analogy to investors.

Investors lose all the time, even professionals who in theory are supposed to be hitting harder, more accurately outside of their opponents reach as he describes it the competition is so intense. There are so many bright, well educated, knowledgeable, intense competitive players in the market place that they all sort of cancel each other since investing is a zero-sum game (there must be a loser for every winning trade and vice versa).

The advantage of indexing in Charles D. Ellis’ view is that when you have all of these smart people and they cancel each other out and you know you cannot compete with them as an amateur (you certainly wouldn’t step into a field of a Rugby game on a Saturday and play with the pros because guaranteed you will be taken out in a stretcher without fail) it’s the same thing as you step on to the grid iron of professional investing giants as an amateur, all of a sudden you’re up against smartest, strongest, fastest investment firms who have all the tools and everything they need to beat you, but they’re all competing against each other and what ends up happening is low cost, low activity index funds over the long haul tend to be the best opportunity for most individuals

This is remarkable insight that he developed, not just why indexing works but the way that amateur investors manage to hurt themselves and lose lots of money trying to compete with the pros and no matter how good the pros are, they cancel each other out is really a fascinating insight for all of us because it means we can actually win the losers game by just buying a simple, transparent, broad, and well diversified index fund that tracks the overall market at the lowest possible cost and keep adding to it consistently. By doing this for a long enough period we can outperform 80% (or even more) of all actively managed funds.

Sources: Winning the loser’s game