The phrase “balanced portfolio” sounds admirable, as balance is something most people desire in every area of their life. Individuals look for work-life balance, a balanced diet, and balanced responsibilities at home.

Just as balance is a necessity in other facets of life, investment strategy also requires balance. In this case, it’s about balancing risk and reward. A well-balanced portfolio will combine both stocks and bonds, typically split evenly or with 60 percent in stocks, and 40 percent in bonds. Historically, stocks have been considered the riskier investment of the two, because the value is dependent on the market, and thus beholden to a variety of factors.

While this strategy is still used by many people with great success, there are alternative methods of building a balanced portfolio, thanks to new economic developments and innovative currency options, including digital currency.

Asset Allocation Defined

Asset allocation refers to the way you split up the various properties and funds that belong to you. This could include stocks, bonds, and cash. There are many factors that go into how these assets are allocated. Whether you’re just getting started or looking to change up your portfolio, there are some key things you should consider: 

1. Financial goals – Before you make any adjustments on your portfolio, consider your short- and long-term goals. Are you attempting to pay down large debts, save for a home purchase, or pay for schooling? Or are you starting a retirement fund for use many years in the future? All are important factors to consider, and may impact how much risk you’re willing to take on when investing. 
2. Timeframe – If you know the timeframe of future purchases, retirement, and other things you will need liquid funds for, this can also impact the type of investing you do.
3. Risk tolerance – Some people are far more comfortable with financial risk than others. Take stock of your own level of risk tolerance, and consider what you would do if an investment went poorly. This can help determine what risk factors are acceptable to you.

Conventional wisdom often says to be riskier in the early days and more stable as you grow older, but only you can decide what will work best for your needs and goals.

Traditional vs. Alternative Investments

Traditional investments tend to include stocks, bonds, and cash. Many consider these investments an essential part of a well-balanced portfolio. 

1. Stocks are shares of publicly traded companies, and the stock market ebbs and flows based on a variety of factors that can include public demand, media attention, growth, and predictions. The strong possibility of changing prices is one reason why stocks are considered a riskier investment. 
2. Bonds are more sedate, and operate similarly to loans. A bond is when an investor lends money to a corporation or business, with the expectation of a return of the funds plus interest at a later time.The pricing and return on investment for bonds changes with interest rates, but they are considered less risky than stocks. 
3. Cash is one of the easier investment types to make, but has a lower rate of return. A cash (or cash equivalent) investment could include making a deposit to a savings account, or investing in a money market deposit account or fund. The main risk to this type of investment is inflation, causing the value of your cash to go down and outpace gains. 

Alternative investment types include items like digital currency, real estate, or venture capital. These are considered to be additions or diversions from the more traditional investments like stocks.

1. Cryptocurrency is a form of digital payment, like Bitcoin. This type of currency is gathered via blockchain technology, and cryptocurrency as an alternative investment is becoming increasingly popular. There are now more regulations, and more opportunities to trade cryptocurrency for cash, making it more viable for a larger number of people.
2. Venture capitalism is very common in the tech world, for example. An investor will provide a company with capital to grow their business or maintain operations, with the expectation of a significant return on investment. This is known as a higher risk investment, particularly with start-ups, as their future profitability is unknown.
3. Investing in real estate, artwork, antiques and other items that hold their value is another type of alternative investment. Generally, these types of investment are considered solid, but there is inherent risk as any of the purchased items or homes could lose their value or become damaged.

Why Asset Allocation Is Important

It’s important to spread your assets out amongst different industries and different investment types. This provides significant protection and can lessen your overall risk when it comes to investing. Allocating assets to different investment types, like stocks, bonds, cash, and real estate, can help ensure at least one of your investment categories is performing well. In layman’s terms, it’s rare for all investment categories to trend downward at the same time, but they do impact one another. The market conditions that cause a stock price to rise, for example, may cause a different category to yield lower returns. With proper asset allocation, you can keep your investment income more stable.

Diversification Defined

Diversification is simply investing in a variety of different investment types to minimize risk. A well-balanced portfolio is diverse, and allows you to achieve your financial goals. The planning and selection process should help you find the right bundle of investments to make to maximize profits and limit losses.

Why Diversification Is Important

Diversification reduces risk by providing a balanced mixture of high and low-risk investments. Without this important variety, the return on your investments may not stretch to fit your goals. If you have a short-term goal of purchasing a used car, for example, you wouldn’t solely invest in lower risk bonds, as you wouldn’t get enough gains for it. It’s important to define your short and long-term goals when building your portfolio, to ensure that the mixture of investments will provide enough in returns to fund your dreams.

Balanced Portfolio Defined

A balanced portfolio is one that contains a healthy mixture of different investment types. What those investment types are depends on the investor’s long and short-term goals, as well as their preference for risk. Generally, a balanced portfolio contains a few high-risk investments with high rewards, low-risk investments with average to low rewards, and cash.

Why a Balanced Portfolio Is Important

The purpose of a balanced portfolio is to protect the investor, a.k.a. you, from losing too much or not achieving your goals. As mentioned earlier, there are certain types of investments that pair well with short-term goals and vice versa. A well-balanced and thoughtful portfolio can help you achieve those financial goals. 

For more information, check out the other helpful articles available from the Dash blog.