BALLASTS for your portfolio

Informed Canadian Investor

To begin, I’ll share a story with you about the ups and downs of portfolios.
I once took on a new client. Six months after we started working together, he was unhappy and he wanted me to switch up what I was doing. Six months later, he was unhappy and we switched things up once again. In another 6 months, he moved half of his accounts to another firm and we switched things up again with the assets that remained with me.
I do try hard to please my clients. At that moment, however, I realized, while I am talented at navigating the waters when clients have patience, I can’t do well when the client is like Yosemite Sam shooting slugs at the ground beneath my feet while yelling, dance.
So, for the clients that expect perfection, let’s talk about the ballast in your portfolio and you will see how some advisors give dancers like Israel Galván a run for their money.
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We like the upward swings and dislike the downward swings in our investment portfolio values. What minimizes the downward swing in your portfolio can be called a ballast, though this term is infrequently used. Nevertheless, I will use this term to inform you of what is available for your investment portfolio.
Before we get into the discussion, we need to set aside your plans for your financial needs in the next 1-3 years. When you have these short term needs covered, those assets are outside of this discussion.
Our next stop is to look at the two types of ballasts that come from the engineering industry. They follow different approaches, which helps explain the ballast types in the investment industry.
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Cruise ships have added weight at their bottom for stability, which steadies the passenger experience and their emotions. You probably have noticed how cruise ships swing side to side far less than smaller vessels. That is the ballast at work. The taller the ship, the larger the ballast and the larger the ballast, the more resources the ship uses to move from port to port.
Airplanes also have a ballast. As airplanes seek to be as light as possible, they engineer the airplane and distribute luggage so that the plane will fly straight without the pilot needing to hold onto the controls.
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Here’s an interesting hypothetical question: can you get a ballast that is larger than 50% of your portfolio value?
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Here are 9 types of ballasts available to the everyday investor:
The default industry ballast is called fixed income, which is typically bonds, GICs and cash. For example, if the market drops 10% and your portfolio is invested in 50% of the market and 50% cash, your portfolio will only drop 5%. It will drop maybe 4% when the cash is invested in GICs and when the cash is invested in bonds, it depends on the bond market at the time. For illustration, let’s say a 50% bond portfolio means the portfolio will drop 3 to 7%. Do know that this bond discussion is for illustration purposes. There are a wide variety of bonds with some as volatile as stocks.
For those that have stocks in their portfolio, buying low and selling high is a technical approach that might reduce downward swings.
Stocks have a measure assigned to them called the PE Ratio. It is the price of the stock divided by the earnings of the company. It is a way to compare stocks. Thus, as the PE Ratio increases relative to other stocks, it encourages selling high and buying low. What is interesting about the PE Ratio is that sectors tend to have their own range of PE Ratios. As a result, people that value PE Ratio tend to invest in fewer sectors, which is less diversified.
Stocks have a measure assigned to them called beta. When a stock has a negative beta, the stock is expected to move in the opposite direction to the stock market. Negative betas are uncommon. When the stock has a beta betw

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