Achieving a Balanced Portfolio

The reminders to individual investors to maintain a balanced portfolio come every day as either helpful hints in the email inbox, or given as sage advice on the news at the end of the money reports each evening on the news. It is always a similar quip, following a detailed analysis of a specific sector by an economic forecaster they are asked “how can out viewers make use of this to protect themselves or take advantage of this situation?” The reply, after a lot of additional verbiage, always ends with make certain they are diversified and have a balanced investment portfolio.

Many people are not even certain what that means. This is unsurprising since if you Google it, you will find literally hundreds of different models that tell you what the best portfolio consists of. They explain to you what your risk tolerance should be based on age and family size and years to retirement. The whole process is relatively simple when investing on smaller scale and primarily in assorted mutual funds. You can simply choose a fund and it will be a “diversified” fund, or “high growth” or “income” fund and if you want to be more diversified you invest in several different funds.

While this process works for individuals that simply want to have a percentage of their income set aside each pay period toward retirement, there are many people that want more control over their money and investments than that allows. In exchange for reduced fees and greater control, they assume risk for decisions and responsibility in maintaining balance in their portfolio.

The risk for decisions is considerably less than years ago. With the in-depth reports available on the internet and in all of the major media it is not difficult to change investing decisions from haphazard guesses to well researched decisions. You will not always be correct, but neither are the professionals that you pay fees to. In the stock market of 2008 and 2009 few people made money and many lost. In the market of 2012 and to this point in 2013 it was the opposite, with little skill needed to see growth. Where the care is truly needed in venturing into your own investing is in the diversification required to give a level of safety to your capital.

There are several sectors in the financial markets, each with its own risks and rewards. Bonds provide varying levels of security, but the rating agencies make the risk associated relatively transparent so inclusion of bonds in some percentage is often a good idea to insulate against a down stock market. Stocks provide the opportunity for both dividends and capital gains and selection of stocks based on income potential as well as growth potential is commonly done. Commodity and currency exchange markets allow you to make profits regardless of whether the economy as a whole is doing well. Real estate investing requires entering into funds for all but the largest investors but is hard to beat when looked at from the perspective of long term growth.

Maintaining your own investment portfolio without benefit of input from a financial planner or team of expert consultants requires you to understand how all of the different markets work and to distribute your portfolio between all of these areas. By maintaining a presence in all of the areas, you will be positioned to easily shift money into areas of growth and opportunity from areas that are under performing. Relying on any single area will vastly increase risk and prevent you from profiting at different turns in the economic cycle.

If you do not have the experience or do not understand some markets there are ways to gain the knowledge and experience with little risk. The best examples are found in the Forex markets where numerous trading platforms and brokers offer demo accounts. Using the demo accounts, you can quickly learn an investing style that enables you to make informed decisions instead of guesses as you diversify your holdings for greater profits and security.

 

About the Author
Marcus Holland is editor of the websites financialtrading.com and options-trading.com. He holds an Honors degree in Business and Finance and regularly contributes to various financial websites.

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