A balanced portfolio is an attractive financial strategy for many investors. But what exactly should be in it?
A balanced investment portfolio usually includes a well-diversified mix of asset classes. As a strategy, it strives to balance risk and return in order to maximise personal financial goals. When periodically rebalancing their portfolio, investors can ensure they have the optimal asset allocation, so that it still aligns with their financial objectives.
Investor profile
Before selecting your asset class, it is important to understand your tolerance for risk. This will ultimately depend on your financial circumstances, investment ambitions and how much volatility you can accept. You should also determine your level of investment knowledge.
Investors fall into three categories. ‘Income’ investors who opt for low-risk assets; ‘Balanced’ investors who select low and high risk assets; and ‘Growth’ investors who are more likely to gamble on higher risk assets.
Asset classes
Once you’ve identified your investor profile you will need to determine your exact asset allocation. There are a number of different asset classes. These are Stocks (equities), Fixed income investments (Bonds), Cash and Cash Equivalents, and other asset classes, such as gold, real estate, commodities or hedge funds.
A capital preservation portfolio is primarily invested in bonds, whereas a more dynamic growth portfolio is in equities. A balanced risk portfolio sits somewhere in between. Some investors will opt for strategic, long-term asset allocations, while others will prefer tactical (shorter-term) asset allocation, based on expectations for different asset classes.
Diversification
If there is one golden rule in balancing a portfolio, you should be diversifying and spreading widely. This might involve investing in equities and government bonds from multiple regions, while within equities, it might also mean investing in companies, large and small.
The most popular asset classes, such as equities and bonds, tend to have low correlations with each other, with different factors generally driving their returns. In fact, diversification only really works when asset classes are added to a portfolio and have a low correlation – otherwise it would be counterproductive.
It is worth noting that your asset allocation may change over time, thanks to market movements. Hence, it can be a good idea to rebalance your portfolio perhaps once or twice a year, to manage risk exposures.
If you need professional advice on investment management in Cheshire, call our team at Hartey Wealth Management today.
