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The Blended Portfolio

What is a blended portfolio?

Put simply, a blended portfolio is a portfolio comprising of a mix of carefully constructed assets, which complement each other with the aim of producing the optimal outcome for the investor. Modern portfolio theory is the common basis on which investment portfolios are constructed for both private individuals and large institutions. One of the essential elements of modern portfolio theory is the need to hold a portfolio of investments which blend together to achieve the results you are looking for.

What are the principles of modern portfolio theory?

Some of the basic principles of modern portfolio theory are:

  • Superior long-term returns come from shares and property,
  • These higher returns are the reward for taking on more risk,
  • You can reduce risk by spreading your investments across different asset classes,
  • When you diversify your investments you must choose each investment for a reason, and
  • A properly diversified, blended portfolio can produce higher returns with less risk.

How do you blend portfolios?

There are two fundamental processes involved in constructing a blended portfolio that will achieve the desired results. They are:

  • Decide how much of your investment to allocate to each type of market, and
  • Within each investment market, select the most appropriate mix of investments to deliver the expected results.

How do we allocate assets?

In deciding which asset allocation we recommend to our clients, our investment research team conducts extensive modelling of past investment returns and expected future returns.

We then construct a series of five reference asset allocations ranging from defensive to high growth, which are expected to provide higher returns for a higher level of risk. We also test these asset allocations to determine their probability of producing:

  • Negative returns,
  • Returns less than cash rate, and
  • Returns less than inflation.

Having assessed your risk profile and the period of time over which you are investing, we then recommend an asset allocation (in a blended portfolio) to meet your needs.

How are investment funds blended?

Our investment research team conducts complex modelling to work out which fund managers best fit together in a portfolio. In carrying out this work we need to analyse:

  • Investment returns,
  • Historical risk,
  • Investment style, and
  • Fees and charges.

This ensures we achieve the blend that gives our clients the right mix of risk and return – a process called ‘mean variance optimising’.

How does this help you?

By using mathematically based methods of asset allocation and investment selection, your portfolio is constructed in a way which is most likely to satisfy your investment objectives. Modern portfolio theory is constantly being researched and updated to ensure that the principles we use remain relevant to changes in investment markets and investment products.

Review your investment portfolio (superannuation or otherwise)

The experienced team of advisers at Continuum Financial Planners Pty Ltd is ready to work with you, to review your financial goals and strategies; and to develop investment portfolios that are in your best interest – and don’t keep you awake at night. To arrange a meeting with one of the team, phone our office on 07-3421 3456; or complete the website Contact Us form – and we will respond promptly.

(Originally posted in 2010, this article has been occasionally update, most recently in September 2018)

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