A History of Asset Mixes

The Efficient Frontier

July 27, 2017

Here’s an interesting question: What does an investor need to do to achieve a 7.5% return with the least amount of risk possible?

A somewhat speculative answer to this question was proposed by researchers at the Callan Institute – part of Callan Associates Inc., a U.S. based investment advisory firm headquartered in San Francisco – in a report originally published in September 2016 called Risky Business.

I’m sharing these insights with you for illustrative purposes only; they are most certainly not a recommendation and the asset mixes suggested are not for everyone. But the material makes for interesting reading.

Let’s go back to 1995

Back in 1995, a portfolio made up entirely (100%) of fixed income investments was – according to The Callan Institute – projected to deliver a return of 7.5%. Now, according to the Callan institute, that fixed income portion is down to 12%, with private equity and stocks making up around 75% of the portfolio.

The Efficient Frontier

The Callan Institute routinely conducts asset allocation studies for clients in order to determine the risk associated with portfolios that are designed to generate an expected return. They use an optimizing tool that helps them find the “efficient frontier,” meaning the right combination of assets that provides the highest return for the lowest risk.
In 1995, their expectation for broad U.S. fixed income was exactly 7.5%. They found a 100% fixed income portfolio was an efficient way to achieve that return, with a standard deviation of just 6%


Ten years later, according to their analysis, an investor seeking a 7.5% return would have needed a portfolio containing 48% relatively risky, return-seeking assets, with just 52% in fixed income.

And between 2005 and 2015 – again, according to their analysis – an investor had to elevate the risk in the portfolio even more and include 88% in return-seeking assets, with just 12% in fixed income.

Standard Deviation

Meanwhile, the standard deviation almost doubled from “only” 8.9% in 2005 to 17.2% in 2015. Standard deviation is, as many of you know, a widely accepted measure of risk.

So the headline is that in just two decades, the risk required for the delivery of a 7.5% return nearly tripled from 6% to 17.2%. A sobering thought, at the very least, and one that requires careful consideration.

Getting the right portfolio planning asset mix for your unique situation is a discussion worth having. Let me know if I can help you resolve any questions and uncertainties you may have.

Michael Fahy, The Michael Fahy Group, CIBC Wood Gundy, 604-691-7207.