This is the third article in our series on the four different types of investors. So far, we’ve covered The Avoider and The Risk Taker. Here we take a closer look at The Balancer – how they tend to behave and the factors that influence their investment decisions. Once again, the intention is not to put people in a box. But by understanding your general type, you might gain some insight into how you’re making your investment choices, and recognise if you might need to change the way you’re approaching them.

Profile

Unlike The Avoider, who finds it difficult to start investing, and the Risk Taker, who invests aggressively, The Balancer has a different approach.

Balancers are normally less impulsive than risk takers. They like to look at the whole picture and weigh their options before deciding how to invest. Because of the bewildering array of choices available, they may have a tendency to take a long time to decide. However, Balancers can narrow down their options by knowing what their investment goals are, as well as their timeframe for achieving them. By their nature, they also prefer to keep their fingers in many pies, in order to hedge their bets.

As such, Balancers are often led to create a diversified portfolio of single-asset unit trusts, or as a simpler option, to choose multi-asset or “balanced” funds such as the M&G Balanced Fund. This fund invest in a mix of equities, fixed income assets like bonds and cash, and property, all of which have different risk profiles and respond to different market conditions in different ways. The Fund also invests in offshore assets, but if you’re looking for more offshore exposure, you could also take a look at the M&G Global Balanced Feeder Fund which allows you to invest directly in rands instead of having to take your money offshore.

While there are many benefits to diversification, there are also some pitfalls. We look at both below.

Benefits of diversification

Combining different assets in an investment portfolio reduces the overall risk of the portfolio, while at the same time giving you exposure to more opportunities to generate returns. Among investors, diversification is known as the “only free lunch” in investing, because it can increase your return potential without adding to risk, creating the “optimal” portfolio by taking the appropriate amount of risk for the additional prospective return added.

Diversification also offers a ‘smoother ride’ for investors over time than only investing in equities or listed property. In other words, you will experience less volatility (when an asset’s value goes up and down) over the term of your investment. This can help you to avoid selling out of your investment during difficult market conditions, which could cost you money. To learn more about volatility, read our article What you need to know about market volatility.

Pitfalls of diversification

One pitfall of diversification that Balancers can fall into is being overly diversified by investing across too many different fund managers. Just looking at stocks, in South Africa we have relatively few companies available on the JSE to invest in, some of which are not easily tradeable. Also, at any given time in the economic cycle, certain companies may have more favourable outlooks. As a result of this narrow investment universe, fund managers can, and do, end up buying the same stocks. If your portfolio incorporates a wide range of fund managers, there can be duplications across their underlying holdings that you aren’t aware of, which undermines the diversification benefits are undermined. Therefore, staying with one or two managers in each investment style (i.e. value, growth, momentum, hedge funds) can be a savvy decision.

It can also be difficult to get the mix of underlying assets exactly right. That is why it’s best to leave this up to the professionals and invest in a balanced fund. Balanced funds come in three main categories, depending on the amount of equity they hold – low equity, medium equity, and high equity. Which one you choose should depend on your investment goals and time horizon. This is where working with a qualified financial adviser can really help.

It's all in the mix

As you can see, getting the balance right in investing can be challenging, but it can certainly help you reap the rewards of good performance, with less risk. If you’ve done your planning right, and you have a medium- to long-term time horizon, then having an appropriately diversified range of assets in your portfolio can not only help you reach your goals, but it will also help you sleep better at night knowing that you’ve reduced the volatility in your portfolio, and thus the risk.

For more information on investing with M&G Investments, please feel free to contact our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.