Why Being 100% Invested – or Too Defensive – Can Both Hurt Long-Term Returns
Introduction
One of the most common investment mistakes we see is investors sitting at one extreme or the other.
Some investors hold too much cash because they are worried about market volatility. Others remain fully invested at all times and leave themselves no flexibility when opportunities arise.
Neither approach is ideal.
A well-constructed portfolio often sits somewhere in the middle — remaining invested for long-term growth while still holding some liquidity to take advantage of market downturns.
At EPG Wealth, we work with clients to build portfolios that strike the right balance by taking a personalized approach to portfolio construction. We believe this is far more effective than relying on models largely shaped by industry frameworks or third-party interests. By focusing on the client’s individual objectives, circumstances and risk profile, the strategy is designed to work in the client’s best interests, rather than being influenced by institutions such as banks or broader industry structures offering what best suits them and not you.
The Problem With Being Too Defensive
Holding excessive cash or defensive assets can feel comfortable, particularly during uncertain economic periods.
However, over the long term this approach often comes at a cost.
Growth assets such as shares have historically outperformed cash and fixed interest over long periods. While defensive assets reduce volatility, they also reduce expected returns.
For investors with long investment horizons — particularly those accumulating wealth through superannuation — being too conservative can materially impact long-term wealth creation.
Illustrative Long-Term Return Expectations
Cash: approximately 2–3% per year
Bonds / fixed interest: approximately 3–5% per year
Growth assets (shares / property): approximately 7–10% per year
Over a 20–30 year investment horizon, the difference between these return levels can translate into hundreds of thousands of dollars in potential wealth creation.
The Problem With Being Fully Invested
While maintaining strong exposure to growth assets is important, being 100% invested with no available cash can also create challenges.
Markets regularly experience periods of volatility. These periods can create attractive buying opportunities for long-term investors.
If a portfolio is already fully invested, investors may miss the opportunity to invest additional funds when markets decline.
A Smarter Approach: Staying Growth-Focused While Maintaining Flexibility
One strategy some portfolios use is maintaining a small allocation to cash while holding growth assets that may include internally geared investments.
Internal gearing means the investment itself uses borrowing within the structure to increase exposure to the underlying assets.
This can allow a portfolio to:
- Maintain strong exposure to growth assets
• Keep some liquidity available
• Potentially enhance long-term return potential
For example, a portfolio might hold:
Growth assets: 85–90%
Cash / defensive assets: 10–15%
Within the growth allocation, some investments may use internal gearing, which can increase the effective exposure to growth assets while still allowing the portfolio to retain some liquidity.
Why Liquidity Matters During Market Volatility
Market downturns can feel uncomfortable, but they also create opportunities.
Investors with available liquidity may be able to increase their investments when markets fall, potentially improving long-term outcomes.
For example, if markets decline 15–20%, investors with available cash may be able to purchase assets at significantly lower prices.
Over time, these purchases can materially improve portfolio returns when markets recover.
Case Study: Investing During a Market Downturn
Consider two investors with similar portfolios.
Investor A remains fully invested at all times.
Investor B maintains a modest allocation to cash and invests additional funds during a market downturn.
When markets recover, Investor B may benefit from having purchased assets at lower prices, improving long-term portfolio performance.
The illustration below shows how investing additional funds during a market decline can improve long-term portfolio outcomes.
How EPG Wealth Helps Clients Structure Smarter Portfolios
At EPG Wealth, we help clients design portfolios that aim to achieve long-term growth while managing risk appropriately.
This includes:
- Structuring diversified portfolios across global markets
• Ensuring the appropriate balance between growth and defensive assets
• Reviewing investment allocations as circumstances change
• Maintaining flexibility within portfolios for market opportunities
Our advice process focuses on ensuring clients understand how their portfolio works and why each investment plays a role.
Final Thoughts
Successful investing is rarely about extremes.
Being too defensive can limit long-term wealth creation. Being fully invested at all times can remove flexibility when opportunities arise.
A balanced approach — maintaining strong exposure to growth assets while retaining some liquidity — can help investors remain positioned for long-term growth while still having the ability to act during market volatility.
If you would like to review whether your portfolio is structured appropriately, please click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.