How Should a Well Balanced Portfolio Perform?

We have seen time and time again what happens when you do not keep your portfolio balanced. You can see massive drawdowns with too much concentration risk. Whether it be to tech, microcaps, or country risk, you could see your portfolio halved before you even realize it. So how should a well balanced portfolio actually return?

First let’s think about a company who we could replicate a portfolio from. We will use Blackrock as an example. One of, if not the largest investment management companies on the planet. Where does Blackrock keep its investments? There is a concentration at the top of more than 200 investments Blackrock holds. But what we can do is take the top 25 holdings in Blackrock (found in their 13f report) and extrapolate the data into our own portfolio to see how the largest fund on the planet performs.

The reason that we are only looking at the top 25 holdings, is that we don’t want our portfolio to become overcomplicated. We want our well balanced portfolio to stay simple and manageable. In the days of feeless brokers, we still want to know what is actually in our portfolio. And, if we stray too high above 25 positions, we start to just plainly mimic the S&P. Our goal here is to beat the S&P every year.

Here are Blackrock’s top holdings:

You can see that they basically mimic the top holdings of the S&P, with a few differences. Next we are going to do a regression to see how well this portfolio has performed over time. We are going to be limited to only going back as far as June 2012 because that was the year Facebook IPO’d. We are also going to have this portfolio rebalanced every quarter. Now, I want to note that some of the stocks that are in this portfolio may not have been there 7 years ago, but that is the reason why we are rebalancing this portfolio quarterly. There may be some swapouts that we need to make at the lower end to continue this portfolio. But for now, we will use what we have.

Our portfolio would have returned nearly 20% over seven years if we had rebalanced every quarter, with the worst year being negative 1.03%. Vs the S&P, we would have had nearly the same if not less risk, but much greater return.

Every single year since the inception of the portfolio, we would have beaten the S&P. You can see in the below graph:

This is simply from copying what one of the largest investment companies in the world is doing. This type of strategy is not unheard of. The secret is patience and confidence in your positions. This is how a well balanced portfolio is supposed to perform.

Let me know what you think.

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