Balance is the ability to stay upright when you are acted upon by outside forces. If you apply too much force in one direction, you will likely fall. The same principal applies to your investment portfolio. Creating a properly balanced portfolio will help keep your investments steady, even during uncertain financial times. The U.S. Securities and Exchange Commission refers to this process as asset allocation.
Before you can develop a properly balanced investment portfolio you must know how much time you have for your investments to work. The longer you have before you reach retirement age, the more risk you can afford to take. The weighting of investments in your portfolio will likely shift as you approach retirement age. The portfolio for an investor with 30+ years before retirement might have 90 percent in stocks and 10 percent in bonds, while the portfolio of a person in his mid-50s might be split 50/50 between stocks and bonds, according to the American Association of Individual Investors.
Just because you are young doesn't mean you are a risk-taker. Some people have a natural aversion to risk regardless of their age. If the thought of losing money in your stock mutual fund keeps you awake at night, it's probably not the most appropriate investment for you. You can still create a balanced portfolio with investment products that you feel comfortable with.
Diversification is a key element of a properly balanced portfolio. Diversification is a risk-management philosophy that seeks the middle ground; no home runs, but no strike-outs either. A properly diversified portfolio will hold investments both among and within investment categories and investment types. For example, your portfolio might hold stocks in companies across investment sectors, such as manufacturing, retail and transportation categories. It might hold stocks of different companies within each sector. It might also hold bonds from companies in different sectors, as well as intermediate and long-term U.S. government bonds and municipal bonds.
Re-Balancing Your Portfolio
Your investments don't exist in a vacuum. The market fluctuates on a daily basis and the value of your investments will fluctuate along with it. Once you have created a properly balanced portfolio of investments, you'll need to revisit it from time to time to ensure it remains balanced. For example, your portfolio might consist of 70 percent stocks and 30 percent bonds as a balance you are comfortable with. If your stocks have a strong performance and increase significantly in market value, you might find your portfolio over-balanced with 80 percent in stock and only 20 percent in bonds. Re-balance your portfolio by selling stocks and investing the proceeds into bonds until you reach your target 70/30 balance.
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