How to Build a Balanced Investment Portfolio

A well-balanced investment portfolio is one that seeks to balance risk and return. This type of investment strategy combines equities and fixed income securities in order achieve a higher return while still managing risk. This type of strategy is inherently more risky than a strategy designed to preserve investments or provide a fixed income alone. The advantage to a balanced portfolio is that a higher return is earned as a result of the increased risk level. Most balanced portfolios are designed to be fairly long term investments. This extended time horizon provides ample time to regain losses experienced by the more risky investments.

Combine a variety of stocks to achieve an optimal combination of risk and return. A combination of several different stocks will also provide the benefits of diversification. Purchase stocks of companies of different sizes in multiple sectors of the economy to reduce the likelihood of losses. Large cap stocks often generate an income in the form of a dividend and are often a relatively stable investment. Mid and small cap stock are more volatile but provide a higher return in the form of capital gains.

Purchasing index funds allows the investor to capture the risk to return ratio of a market as a whole. Index funds often make up a large portion of a well balanced investment portfolio. Purchase index funds that are designed to mimic the U.S. economy, as opposed to focusing on a small number of large corporations. Index funds can also be used to capture specific sectors such as technology, energy, utilities or financials. Index funds can cover just about every market around the world.

Buy Investments in emerging markets. Emerging markets and other international funds provide further diversification and can increase the overall returns of a portfolio. Emerging markets offer large potential gains in return for higher risk. Investing in index funds for emerging markets or specific countries is an easy way of diversifying your investments geographically.

Fixed income securities are an important part of a balanced portfolio. Investments in US treasuries, municipal bonds and corporate bonds allow you to dampen the overall risk level of a particular portfolio. By increasing the proportion of fixed income securities in a portfolio, you will effectively reduce the risk of the portfolio as a whole.

Money market accounts also provide a reduced risk level and can be used to keep a balanced portfolio somewhat liquid. Funds that are placed in a money market account earn a small return slightly higher than a savings account. These funds are readily available and very safe.

Investing in real estate is another opportunity to diversify your investment. Real Estate Investment Trusts (REITs) are a way to invest in real estate with out having the hassles of owning and managing the property. REITs can be bought and sold like stocks but provide an asset backed investment and can be a good way to diversify a balanced portfolio.

Foreign currencies and commodities such as gold are often part of modern investment portfolios. Many investors consider gold to be an inflation hedge. Owning certain commodities can reduce of inflation risk and provide some counter cyclical returns. Foreign currencies also provide a hedge against inflation. Currencies from multiple countries can be combined in basket of currencies to diversify inflation risks. Both currencies and commodities tend to be volatile investments and can significantly increase the risk level of portfolio. For this reason, these types of investments usually make up only a small portion of a balanced portfolio.

Warnings

  • Always consult with an expert before making any money decisions.

References

About the Author

This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.