There are different ways and strategies to create a portfolio. We can’t deny that one of the most common ones would have to be the balanced investment strategy. Here, we combine the asset classes in the portfolio so that there is a balance between the risk and return. Most portfolios that use the balanced investment strategy would have equally divided stocks and bonds. Some are not precisely and equally divided. Instead, they have a slight tilt. For instance, stocks are 60% while bonds are 40%. Many balanced portfolios leave a small amount of cash or money market component to help with their liquidity.
Different kinds of investors and the strategies they use
Investors and their risk tolerance play a significant role in creating portfolios. If we think about it, there are three kinds of investors in terms of portfolios. We have those who prioritize capital preservation and current income, those who focus on growth, and those who fall in the middle of these two.
Let us start with those who are more into current income and capital preservation. These portfolios comprise low-yielding investments like dividend-paying blue-chip stocks, money market instruments, investment-grade bonds, certificates of deposit, and more. If you would rather preserve the capital than growing it, you fall under this category.
Next, we have investors who are thrilled about growing the capital they have invested. They use strategies that are more aggressive and riskier. Hence, they engage in heavier stocks like small-cap stocks. While fixed-income securities are more popular for safer investments, some have lower credit ratings. Yes, they might have lesser security, but investors who take the chance think about the higher returns that they can get. Some examples of these investments include the case of debentures, higher-yielding corporate bonds, preferred shares, and more. Are you a risk-taker? Can you take higher short-term volatility for higher long-term returns? If your answer is yes, you are this kind of investor.
Finally, we have investors who sit in the middle of these two classifications. Their strategy would be combining conservative and aggressive approaches. For instance, a balanced portfolio can look something like this:
- 25% Investment grade bonds
- 25% Small-cap stocks
- 25% Certificates of deposit
- 25% Higher-yielding corporate bonds
This is just an example, and investors can always smoothen their portfolios to the way they want them to. However, if you are an investor who falls in this classification, you will most likely prefer a modest capital return and a high possibility of capital preservation.
Before and after
Is it not great to live and invest during this time? Thanks to the internet and modern technology, investing has never been this easy. We now have automated investing platforms. Investors can now easily customize the way they trade. They can select their preferred strategy and incorporate their risk tolerance. Portfolio allocation is not that complex anymore, unlike before. Before, investors need to manually create their portfolios and buy investments one by one. Also, they can only depend on professionals like investment advisors or financial institutions that offer these kinds of services.
Investors should consider their objective capability in taking risks like their net worth and income when picking out the strategy they will use in creating portfolios. They should also consider their subjective risk tolerance.
To sum it up
A balanced fund combines stocks and bonds components with a minimal money component in a portfolio. These funds will most likely have holdings that are balanced with a constant mix of stocks and bonds. Hence, their holdings have balanced equity and debt combination and the objective in between income and growth.