The art of building a balanced portfolio

By Gina Gallagher | Citizens Contributor

In the world of investing, building a balanced portfolio is an important job — and an art. Your investment portfolio refers to all the investments you own, including the stocks, bonds, mutual funds, and exchange-traded funds that you have in your retirement, brokerage, and other accounts. Having a balanced portfolio is essential to helping you manage market risk and achieve your long-term goals.

So what exactly is a balanced portfolio? It’s actually a combination of cash, bonds, and stocks that help you manage risk and maximize return potential. Here are 5 ways you can build a balanced portfolio.

1. Start with your needs and goals. The first step in investing is to understand your unique goals, timeframe, and capital requirements. For example, if you’re investing for retirement, you’ll need to determine when you plan to retire and how much you’ll need.
2. Assess your risk tolerance. One of the most important factors to consider in building your portfolio and choosing your investments is your comfort with risk. If you’re a conservative investor with a low tolerance for risk, you’ll want to invest a larger percentage of your money in bonds and cash, which are less risky. Alternatively, if you’re an aggressive investor willing to take on more risk for higher return potential, you should have the majority of your money invested in stocks.
3. Determine your asset allocation. Once you’ve determined your financial goals, investment timeframe, and risk tolerance, you should begin choosing your investments and asset classes. There are three main asset classes: stocks (equities), bonds, and cash. Again, the asset class that’s best for you is determined by your financial goals, timeframe, and risk tolerance. For example, if you’re saving for retirement at the age of 30, you won’t require the funds for several years. In such a case, you may be more willing to have a larger percentage of your assets invested in stocks versus bonds or cash due to higher growth potential. Conversely, if you’re in your 50s, you may want to have your asset allocation more heavily weighted toward bonds or money markets, which offer less risk.
4. Diversify your portfolio. Determining your asset allocation is only part of the picture in building your portfolio. One of the most important steps is diversification. Diversification is the process of dividing your money among the asset classes you choose in order to reduce risk. For example, if your asset allocation involves having 60% of your money in stocks or equities, you should diversify your portfolio to include foreign and domestic stocks as well as stocks with different market capitalizations. Similarly, you can diversify your bond investments by term and type, including a combination of government and corporate bonds. One easy way to create a diversified portfolio is to invest in mutual funds, exchange-traded funds, or index funds — all of which are invested in multiple securities — versus individual stocks, thereby reducing risk. Another way to diversify could be to select a lifecycle fund, such as a retirement fund for 2055.
5. Rebalance your portfolio. Because the financial markets and your life are constantly in flux, you never want to employ a “set it and forget it” approach to your portfolio. It’s important to continually monitor your portfolio and rebalance your investments and asset classes. This process involves evaluating the percentage each asset class comprises of your entire portfolio. If, for example, after assessing your asset allocation you determine you have too much money weighted in one asset class, you may want to shift into an underweighted category. This might involve selling some stocks and investing the proceeds in bonds. When rebalancing your portfolio, it’s important to factor in tax consequences, particularly if a security you’re selling is subject to capital gains. In such cases, it may be more prudent to cease investing in that asset class and direct those funds toward the asset class that’s underweighted. You can rebalance your portfolio at any time, though it’s often recommended to do so at least once or twice a year.

Building a balanced investment portfolio that achieves your goals and risk tolerance requires a significant amount of time and knowledge. An experienced financial advisor can do the work for you by determining your investment profile and goals and selecting and managing investments that match your changing needs — and risk tolerance.

A Citizens Wealth Management Advisor can help you build a long-term investment strategy with your goals in mind. Find an Advisor so you can start planning for your goals.