Balanced Investment Strategy

What is a balanced investment strategy?

A balanced investment strategy combines asset classes in a portfolio in an attempt to balance risk and reward. Typically, a balanced portfolio is split between stocks and bonds, either equally or slightly skewed, such as 60% stocks and 40% bonds. A balanced portfolio may also maintain a small cash or money market component for liquidity purposes.

key takeaways

  • A balanced investment strategy seeks a balance between capital preservation and growth.
  • It is used by investors with a moderate risk tolerance and usually consists of fairly equal amounts of stocks and bonds.
  • A balanced investment strategy is in the middle of the risk-reward spectrum. More conservative investors can choose capital preservation strategies, while more aggressive investors can choose growth strategies.

Learn about a balanced investment strategy

There are many different ways to combine a portfolio, depending on the investor’s preferences and risk tolerance.

On the one hand are strategies aimed at preserving capital and current income. These typically include safe but low-yielding investments such as certificates of deposit, investment-grade bonds, money market instruments and some blue-chip stocks that pay dividends. Such strategies are suitable for investors who are concerned with preserving existing capital but not increasing capital.

Another aspect is a strategy for growth. These more aggressive strategies typically involve higher-weight stocks, including small-cap companies. If you include fixed income instruments, they may have a lower credit rating or safety, but higher yields, such as bonds, preferred stocks, or higher-yielding corporate bonds. Growth strategies are suitable for young investors with a high risk tolerance who are happy to accept greater short-term volatility in exchange for better expected long-term returns.

Investors in between these two camps can choose a balanced investment strategy. This will include a mix of conservative and aggressive approaches. For example, a balanced portfolio might include 25% dividend paying blue chips, 25% small cap stocks, 25% AAA rated government bonds and 25% investment grade corporate bonds. While the exact parameters can be fine-tuned, most balanced investors will be looking for a modest return on capital with a high probability of capital preservation.

In the past, investors needed to manually put together a portfolio by buying individual investments. Or, they have to rely on professionals such as investment advisors, or through the services of their financial institutions. Today, automated investing platforms allow investors to automatically invest in strategic choices organized by risk tolerance. The portfolio allocation process is more accessible than ever.

When deciding which strategy to choose, investors must consider not only their objective risk tolerance, such as their net worth and income, but also their subjective risk tolerance.

Balanced Fund

A balanced fund is a mutual fund that contains both stock and bond components, as well as a small money market component in a single portfolio. Generally, these funds stick to a relatively fixed portfolio of stocks and bonds, such as 60/40 stocks and bonds. A balanced mutual fund’s holdings are balanced between equities and debt, with goals between growth and income. This led to the name “Balanced Fund”.

Balanced mutual funds are aimed at investors looking for safety, income and moderate capital appreciation. Often, retirees or investors with a low risk tolerance use balancing funds for healthy growth and supplemental income. The stock component helps prevent a decline in purchasing power and ensures long-term preservation of retirement savings.

Examples of Balanced Investment Strategies

Trishia is a college graduate in her 20s. She is new to investing and has about $10,000 to invest. Although Trishia intends to make a down payment over the next few years, she has no immediate need for investment funds and can defer withdrawals until a more favorable time in the event of a sudden market drop.

To be fair, Trishia’s youth and financial situation allow her to pursue relatively risky investment strategies with high long-term growth potential. However, she opted for a more conservative approach given her subjective risk tolerance.

Using an online investment platform, Trishia decided to adopt a balanced investment strategy with a 50/50 ratio between fixed income securities and equity securities. Fixed income securities mainly include high-grade government bonds, as well as some high-grade corporate bonds. The stock is made up of blue chips, all known for stable earnings and dividends.

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