How to Build a Balanced Investment Portfolio: Strategies for Long-Term Success - Bellwether
- Editorial Staff
- 3 days ago
- 4 min read
A balanced investment portfolio means that you have a mix of stocks, bonds, mutual funds, exchange-traded funds, real estate investments and other assets so that not all of your financial eggs are in one basket.
Balance is important for several reasons when it comes to your investments, arguably the most important being minimizing risk. Think about it like this: If all of your investments are in stocks and the stock market goes belly up, your portfolio is going to be hurting. The same is true if the bond market significantly weakens or completely collapses—if all that you're investing in is bonds, your entire portfolio is going to suffer.
It's a big part of the reason why financial advisors suggest balancing your portfolio in a manner that will ideally allow you to increase your wealth and net worth. But if one type of investment in your portfolio were to go awry, a balanced portfolio ensures that there's enough diversification so that your finances wouldn't be significantly impacted.
In this post, we'll talk about the importance of a balanced investment portfolio and how to build a balanced portfolio to set you up for long-term financial success. Read on to learn more:
Benefits of a Balanced Investment Portfolio
We already discussed arguably the most important benefit of building a balanced investment portfolio: risk mitigation. A balanced portfolio ensures that you don't have all your money tied up in just one asset, which can help protect your finances if that asset struggles or loses value over time.
However, there are other key benefits involved in having a balanced investment portfolio. For instance:
It allows you to mix your assets at levels that meet your investment goals and at a level of risk that you're comfortable with.
It ensures your money is evenly spread among assets. For instance, you would rather not have too much money invested in one particular asset, just as you don't want to invest all of your money in just one stock.
Keep in mind that to maintain a balanced portfolio, you'll need to monitor and rebalance it on occasion. Rebalancing is best done at certain set intervals (i.e., monthly, quarterly, annually, etc.) or at periods when your assets meet certain financial goals. Rebalancing is often done by selling off one investment and purchasing another.
Strategies for Building a Well-Balanced Portfolio
So how can you build a well-balanced portfolio? It all starts with setting some long-term financial goals and assets, and then deciding how much risk you're comfortable with. The level of risk that you're comfortable with will dictate how aggressive you are with your investment strategy.
Assessing your risk level is important because it can help you decide where and how you invest your money. For instance, if you want to be more low-risk, you'll likely want to invest more in bonds and cash, which tend to be more risk-averse. If you want to be more aggressive, you might consider more stock options or cryptocurrency.
Many investors will opt to be more aggressive with their portfolios when they're younger and then more conservative with their portfolios as they age after they've built significant wealth.
Asset Types to Consider
The four most common assets that people tend to build their portfolios with are:
Stocks
Bonds
Mutual funds
Exchange-traded funds
But these are hardly the only options that investors have to choose from — and depending on how risky or risk-averse you want to be with your investment strategies, you may choose one or more of these in addition to many others.
For example, bonds and cash reserves aren't the only types of options for investors who want to be conservative and less aggressive with their strategy. High-yield savings accounts, index funds, money market funds, and short-term certificates of deposit are all low-risk options.
Conversely, there are several high-risk options for those who want to be aggressive. Aside from cryptocurrency and stocks, real estate investment trusts (REITs), high-yield bonds, investing in foreign markets, and venture capital funding represent more risky forms of investment. Keep in mind that with more risk also comes the potential for greater reward.
Keys to a Balanced Portfolio
One of the nice things about a balanced portfolio is that it should permit you to spread your assets out between a mix of risk-averse ones and ones that are more risky. Remember, one of the biggest reasons to strive for balance in your portfolio is so that you can properly manage risk. If riskier investments are offset by more risk-averse ones, it's going to bode well for your overall strategy and for your long-term financial success.
Rebalance Your Portfolio
You can't just select your assets, make your investments and then sit back and kick your legs up. Rebalancing is another investment best practice that you should be practicing on occasion to ensure that your portfolio continues to meet your goals and manage risk and market volatility.
Consider Working with an Expert
One of the greatest challenges of maintaining balance in your investment portfolio is being able to consistently monitor it so that rebalancing can occur when necessary. And when your assets are as spread out as they need to be to ensure proper balance, monitoring it can be a challenge. That's where working with an expert financial planner can pay dividends for your portfolio and your long-term investment success.
A good financial expert always has the best interests of their clients in mind. They'll take the time to understand your investment goals, how aggressive you want to be, and the level of risk that you're comfortable with to set the appropriate strategy. And then once this strategy is set, they can monitor and rebalance your portfolio to ensure that it remains consistent with your initial goals.
If a balanced investment portfolio is important to you and you want to ensure it's being consistently monitored, maintained, and rebalanced, consider working with a financial advisor.
Related Content
