A Balanced Investment Strategy: What Is It?

A balanced investing strategy mixes several asset types in a portfolio to strike a balance between risk and return. Bonds and stocks comprise most of a balanced portfolio, either equally or with a slight tilt, with 60% of the portfolio being in bonds and 40% in equities. Balanced portfolios may also keep a little cash or money market component for liquidity needs.

Comprehending a Well-Balanced Investment Approach

A portfolio may be assembled in various ways based on the investor’s interests and level of risk tolerance. Strategies focused on current income and capital preservation are at one extreme of the range. These typically comprise low-yielding, secure assets, including money market instruments, investment-grade bonds, certificates of deposit, and select dividend-paying blue-chip companies. These tactics suit investors who are more interested in protecting their cash than increasing it.

Strategies focused on growth are at the opposite end of the spectrum. Small-cap equities are typically given more significant weight in these more aggressive strategies. If included, fixed-income instruments (such as debentures, preferred shares, or higher-yielding corporate bonds) may have lower credit ratings or be less secure yet give a larger yield. Younger investors with a high-risk tolerance who can tolerate more short-term volatility in exchange for higher predicted long-term returns are good candidates for growth strategies.

Those in the middle of these two groups of investors might choose a balanced approach. This would entail combining aggressive and cautious methods. A balanced portfolio, for instance, would have 25% investment-grade corporate bonds, 25% small-cap stocks, 25% AAA-rated government bonds, and 25% dividend-paying blue-chip stocks. Most balanced investors will aim for moderate returns on their money with a high probability of capital preservation, even though the precise parameters can be adjusted.

Investors used to actively put together their portfolios by buying individual stocks. As an alternative, people were forced to depend on experts like investment advisors or the services provided by their financial institutions. Thanks to automated investment platforms, investors can now automatically make investments in various ways, arranged according to risk tolerance. Allocating a portfolio is now easier than ever before.

Investors should consider both their subjective and objective risk tolerance when deciding which strategy to use—factors like income and net worth measure objective risk tolerance.

Equilibrium Funds

A balanced fund is a type of mutual fund that includes a minor money market component and a combination of stocks and bonds in one portfolio. These funds typically adhere to a set allocation of equities and bonds, such as 60/40 stocks to bonds. The assets in balanced mutual funds are split between debt and equity, and their goal is to achieve a balance between income and growth. Hence, the term “balanced fund.”

Investors searching for safety, income, and modest capital gains should choose balanced mutual funds. Balanced funds are generally used by retirees or investors who have a limited tolerance for risk to generate additional income and healthy growth. The stock component prevents the deterioration of purchasing power and the long-term preservation of retirement nest eggs.

A Balanced Investment Strategy Example

Trishia, who is in her mid-20s, recently graduated from college. She has around $10,000 to invest and is new to investing. Trishia has no immediate need for her investment cash, even though she plans to make a down payment over the next few years. In the case of a sharp downturn in the market, she may wait to take her funds until a more advantageous moment.

In all honesty, Trishia’s young age and financial situation make her a strong candidate to take on a somewhat riskier investing approach with significant long-term development potential. Nonetheless, she chooses a more cautious course of action due to her individualized risk tolerance.

Using an online investing platform, Trishia chooses a balanced investment plan with a 50/50 mix between fixed-income and equity assets. High-grade government bonds and a small number of highly-rated corporate bonds make up most of the fixed-income assets. The stocks are blue-chip companies with a track record of consistent dividend payments and profit growth.

Investopedia does not offer financial advice or services related to taxes or investments. The material may not be appropriate for all individuals and is provided without considering any particular person’s financial situation, risk tolerance, or investment objectives. Investing has risk, which includes the potential for principal loss.

Conclusion

• A balanced approach to investing aims to strike a balance between growth and capital protection.
• Investors with a moderate appetite for risk use it, and typically, there is a roughly equal distribution of bonds and equities.
• The center of the risk-reward range is where balanced investing strategies are located. While more aggressive investors may choose growth methods, conservative investors may choose capital preservation techniques.