If you're trying to plan for your retirement and your future, you may have heard about creating a "balanced" portfolio. A balanced portfolio reduces your risk and improves the chances of stable income. However, sometimes it might not be clear exactly what a balanced portfolio is. In truth, portfolios can be balanced in multiple ways.
Balancing the Type of Investments
A good portfolio should have many different types of investments, rather than just stocks. Bonds, CDs, and mutual funds are all other options. When one type of investment fails (such as the stock market), another type of investment often remains static (such as bonds). You want to make sure that your entire portfolio is not going to suffer at once.
In addition to the type of investments, you want to vary your industries. You can invest in stocks that are involved in tech, real estate, or pharmaceuticals. Mutual funds ca also be targeted towards things such as real estate investment, and you can even consider investing directly in real estate. The more diverse your portfolio is, the ore well balanced and sustainable it will be.
Balancing the Value of Investments
It isn't just the type of investments you need to balance, but also the value you hold in each investment. You don't want, for instance, 25% of your stock investments to be in a single stock. If that company performs poorly, you'll see your entire portfolio crash.
In addition to putting money in different types of investments, you also need to have a multitude of various investments. If one stock outpaces the others dramatically, you may want to "balance it out" by investing more in other stocks, so you aren't vulnerable.
Balancing the Risk of Your Investments
Finally, you also need to balance risk. Stock market investments are riskier than mutual funds, which are riskier than bonds. However, you aren't going to have the same risk profile throughout your life. When you're young, you want high risk, high reward investments because they will even out to a higher percentage of gains over time. When you're older, you want lower risk investments, so you won't lose your money before you need to pull it out.
It's a good idea to get professional advice before you begin to invest. A financial planning company can go over your financial situation and your current goals, helping you figure out the best balance for your portfolio.Share