What Is a Balanced Investment Strategy?
A balanced investment strategy combines asset classes in a portfolio in an attempt to balance risk and return. Typically, balanced portfolios are divided between stocks and bonds, either equally or with a slight tilt, such as 60% in stocks and 40% in bonds. Balanced portfolios may also maintain a small cash or money market component for liquidity purposes.
Key Takeaways
- A balanced investment strategy is one that seeks a balance between capital preservation and growth.
- It is used by investors with moderate risk tolerance and generally consists of a fairly equal mixture of stocks and bonds.
- Balanced investment strategies sit at the middle of the risk-reward spectrum. More conservative investors can opt for capital preservation strategies, whereas more aggressive investors can opt for growth strategies.
Understanding a Balanced Investment Strategy
There are many different ways to put together a portfolio, depending on the preferences and risk tolerance of the investor.
On one end of the spectrum are strategies aimed at capital preservation and current income. These generally consist of 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 appropriate for investors concerned with preserving the capital they already have and less concerned with growing that capital.
On the other end of the spectrum are strategies aimed at growth. These more aggressive strategies generally involve a higher weighting of stocks, including small-cap companies. If fixed income instruments are included, they might have lower credit ratings or less security but offer a higher yield, such as in the case of debentures, preferred shares, or higher-yielding corporate bonds. Growth strategies are suitable for younger investors with a high-risk tolerance, who are comfortable accepting greater short-term volatility in exchange for better expected long-term returns.
Investors who fall between these two camps can opt for a balanced investment strategy. This would consist of mixing conservative and aggressive approaches. For example, a balanced portfolio might consist of 25% dividend-paying blue-chip stocks, 25% small-capitalization stocks, 25% AAA-rated government bonds, and 25% investment-grade corporate bonds. Although the exact parameters can be fine-tuned, most balanced investors will be seeking modest returns on their capital, along with a high likelihood of capital preservation.
In the past, investors would need to assemble their portfolios manually by purchasing individual investments. Alternatively, they had to rely on professionals such as investment advisors, or services offered through their financial institutions. Today, automated investing platforms allow investors to automatically invest in a selection of strategies organized by risk tolerance. The process of portfolio allocation is more accessible than ever.
When determining what strategy to select, it is important for investors to consider not only their objective capacity to bear risk, such as their net worth and income, but also their subjective risk tolerance.
Balanced Funds
A balanced fund is amutual fundthat contains both a stock and bond component, as well as a small money market component in a single portfolio. Generally, these funds stick to a relatively fixed mix of stocks and bonds, such as 60/40 stocks to bonds. Balanced mutual funds have holdings that are balanced between equity and debt, with their objective somewhere between growth and income. This leads to the name "balanced fund."
Balanced mutual funds are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation. Typically, retirees or investors with low-risk tolerance utilize balanced funds for healthy growth and supplemental income. The equities component helps to prevent erosion of purchasing power and ensure the long-term preservation of retirement nest eggs.
Example of a Balanced Investment Strategy
Trishia is a recent university graduate in her mid-20s. She is new to investing and has about $10,000 to invest. Although Trishia intends to make a down payment within the next few years, she has no immediate needs for her investment capital and would be able to postpone withdrawing her capital until a more favorable time in the event of a sudden market decline.
Objectively speaking, Trishia's youth and financial circ*mstances put her in a good position to adopt a relatively risky investment strategy that has high long-term growth potential. However, given her subjective risk tolerance, she opts for a more conservative approach.
Using an online investment platform, Trishia decides on a balanced investment strategy featuring a 50/50 split between fixed-income and equity securities. The fixed-income securities consist mainly of high-grade government bonds, along with some highly-rated corporate bonds. The equities consist of blue-chip stocks, all with a reputation for stable earnings and dividend payments.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.
FAQs
What Is a Balanced Investment Strategy? A balanced investment strategy combines asset classes in a portfolio in an attempt to balance risk and return. Typically, balanced portfolios are divided between stocks and bonds, either equally or with a slight tilt, such as 60% in stocks and 40% in bonds.
What is an example of a balanced investment strategy? ›
A balanced investment strategy can consist of investments in government securities, such as deposit certificates, long-term bonds, and blue-chip equities. These investments yield low income but are likely to keep the capital intact.
What is a balanced fund with an example? ›
A balanced fund (hybrid fund) is a mutual fund that normally includes both stocks and bonds. Balanced funds often adhere to a fixed asset allocation of stocks as well as bonds, such as 70% equities and 30% bonds.
What is a balancing investment? ›
What is a balanced investment style? A balanced investment style aims to achieve both capital preservation and capital growth. Sometimes referred to as moderate investing, this style looks to balance risk and reward by investing across varying asset classes.
What is meant by a balanced investment portfolio? ›
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.
What is a balanced strategy? ›
A balanced investment strategy is one that seeks a balance between capital preservation and growth. It is used by investors with moderate risk tolerance and generally consists of a fairly equal mixture of stocks and bonds. Balanced investment strategies sit at the middle of the risk-reward spectrum.
What is an example of a rebalancing strategy? ›
Percentage-of-Portfolio Rebalancing
For example, an allocation strategy might include the requirement to hold 30% in emerging market equities, 30% in domestic blue chips, and 40% in government bonds with a corridor of +/- 5% for each asset class.
What are the disadvantages of balanced funds? ›
Disadvantages of Balanced Funds
The characteristic allocation of a balanced fund—usually 60% equities, 40% bonds—may not always suit an investor's financial goals since needs and preferences can change over time.
What is the average return on a balanced portfolio? ›
Therefore, if your portfolio objective is balanced growth and income, for example, you can expect a long-term average return between 4.5% and 6.5%. Each portfolio objective shown below includes a mix of equity and fixed-income investments that should reflect your comfort with risk and your investment time frame.
What is the risk of a balanced fund? ›
While balanced funds are a comparatively conservative investment strategy, they are still not 100% risk-free because bonds will fluctuate if interest rates change. Since bonds demonstrate an inverse relationship with interest rates, an increase in interest rates will cause bond values to fall.
Balanced. Invests in a wide range of assets, including shares, private equity, infrastructure, property, fixed interest, credit and cash. Designed to have medium- to long-term growth with possible short-term fluctuations.
Who should invest in balanced funds? ›
That can be good if you need stability, but this approach also reduces your long-term returns, since stocks tend to deliver much higher returns over time. So balanced funds may be better for those who need stability rather than the highest levels of returns, making them more suited to older investors.
What is the 5% portfolio rule? ›
The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.
What is a 70 30 investment strategy? ›
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.
What is balanced fund investment? ›
A balanced fund is a type of mutual fund that owns both stocks and bonds. Balanced funds own stocks to benefit from appreciation, and generate income from bonds. Typically, stocks comprise from half to 70% of a balanced mutual fund's portfolio, with bonds accounting for the rest.
What is a good asset allocation for a 65 year old? ›
For most retirees, investment advisors recommend low-risk asset allocations around the following proportions: Age 65 – 70: 40% – 50% of your portfolio. Age 70 – 75: 50% – 60% of your portfolio. Age 75+: 60% – 70% of your portfolio, with an emphasis on cash-like products like certificates of deposit.
What is an example of a strategic investment? ›
Strategic investment deals are structured as a common or preferred share financing from a company (for example, Cisco, Intel, Google) investing in startup companies developing technologies complementary to their businesses.
What is an example of a value investment strategy? ›
Value Investing Strategy
One of the examples can be that stock price can change in a short period of time due to favorable and unfavorable news while at the same time the fundamentals of the company remain unchanged, ie. the fundamental value of the company remains unchanged.
What is an example of direct investment strategy? ›
Direct investment takes different shapes and forms. A company may enter a foreign market through so-called greenfield direct investment, in which the direct investor provides funds to build a new factory, distribution facility, or store, for example, to establish its presence in the host country.
What are examples of investments on a balance sheet? ›
For example, an investor starts a company and seeds it with $10M. Cash (an asset) rises by $10M, and Share Capital (an equity account) rises by $10M, balancing out the balance sheet.
