Is your investment portfolio balanced accordingly? A balanced investment portfolio is a collection of investments held by an individual or entity. Investors manage all investments collectively within the portfolio to achieve specific goals and objectives. to be really balance, a portfolio allocates assets to hedge risk based on the holder’s tolerance.
Balanced investment portfolios are strategic in how they offset risk. At a high level, this could mean balancing the representation of stocks versus bonds. Diving deeper, that could mean offsetting growth stocks with blue chip dividend payers. Diversifying the portfolio creates a balance, which in turn mitigates risk.
Here’s what it means to have a balanced investment portfolio and how to look at your own investments with a risk management mindset.
Balance comes from the sum of all the parts
There are many ways to balance a portfolio. A traditional “balanced portfolio” tends to include 60% equities and 40% bonds. However, since balanced portfolios seek to balance risk and return, they are subject to factors such as an individual’s risk tolerance or time horizon. Common examples can include:
- 90% equities, 10% bonds for young investors with high tolerance for risk
- 80% stocks, 20% bonds for middle-aged investors saving for retirement
- 70% stocks, 30% bonds for those nearing retirement in 3 to 5 years
- 40% stocks, 60% bonds for those who are well retired, looking for passive income
Each example represents the balance, based on the investor. They offset risk and reward accordingly, to ensure stable portfolio performance. Investors with balanced portfolios enjoy the peace of mind that comes with relatively predictable behavior, no matter where they are in their investment timeline.
How to Create a Balanced Investment Portfolio
Regardless of the ratio of fixed income to equity securities, the true balance of the portfolio comes from the composition of those assets. For example, a 90% equity profile might have half of those growing stocks and the other half in blue chip companies. Likewise, a 60% bond portfolio may contain riskier bonds with higher coupon rates. It all depends on the investor.
Identify investment objectives
Without an investment objective, you have nothing to assess the performance of your portfolio. Do you want to invest for your retirement? Grow your discretionary wealth? Investing for your child’s future expenses in college? Your objective investment will ultimately define your risk tolerance and time horizon, which together determine the balance of your portfolio.
Assess risk tolerance
Risk tolerance is your ability to maintain your holdings without locking in losses. How much are you prepared to lose before leaving your positions? Balance comes by watching how happy you are to earn. If you are willing to keep 50% of returns, you must be able to keep 50% of losses. The more time you have ahead of you, the more likely your risk appetite is.
Evaluate the time horizon
The time horizon is the length of your accumulation phase or the time you spend holding an investment. The longer, the more aggressively your portfolio can be balanced. If you are nearing retirement, it is safer to allocate a more traditional balance to your portfolio.
Select asset classes
Different asset classes carry different levels of risk. Small-cap growth stocks, for example, are much riskier than the AAA-rated corporate bonds of a blue-chip company. ETFs give you the opportunity to diversify until you feel comfortable. Real estate is illiquid, but historically appreciates well. Match your investment outlook to the assets that make sense in a balanced portfolio.
Balance, then rebalance
Balance comes from considering all of the above factors in the context of an investment portfolio. Keep in mind that as the assets in the portfolio appreciate at different rates, they will need to be rebalanced. Investors can rebalance every year or at pivotal times in their lives when their investment philosophy or risk tolerance changes.
Most financial planners and investment advisers will follow exactly this route to a balanced portfolio for clients. Often, they will also deepen their research to identify the right assets to ensure accumulation of wealth based on the investor’s goals.
A look at risk by asset class
While most traditional portfolios divide a ratio of stocks and bonds, any investment vehicle can be part of a balanced portfolio. Here is a preview asset classes, weighted by risk (from highest to lowest):
- Actions (for example, actions)
- Index funds and ETFs
- Cash and cash equivalents
- Fixed income (for example, bonds)
Building a balanced portfolio begins with identifying assets that match your risk tolerance and investor mindset. Then it comes down to fine-tuning the ratio of those holdings to the total portfolio and balancing the assets themselves.
Consider investing in balanced funds
If building a balanced portfolio seems like a lot of work, you can choose to invest in a balanced fund. Mutual funds and some ETFs are aimed specifically at investors who want mitigated risk in a portfolio focused on unique criteria. There are mutual funds for everyone, from the aspiring investor in their twenties to the risk averse senior approaching retirement. Just be sure to keep an eye out for management fees!
Balance is in the eye of the beholder
Balance means something different for everyone. If you’re a new investor in your 20s with an appetite for risk, your 90% equity portfolio might include a few market pillars as a hedge against growth stock volatility. If you’re 70 and ready to retire, the balance tends to lean heavily towards fixed income investments and avoid stocks.
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Organizing your portfolio to achieve the right risk-return balance is something unique for every investor. Consider the most important factors at play, understand asset classes, and continue to pay attention to how your portfolio grows and changes based on your outlook.