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Guide to Balancing a Portfolio for Beginners

  • By Cliff Anderson | 8 minute read

  • Having a balanced portfolio will help protect your retirement against sudden market shifts

    Investing your money wisely is the key to achieving a comfortable retirement for yourself and your family. However, there is no good investment strategy without a well-balanced portfolio.

    Learning how to balance your portfolio is a skill that will enable you to spot the best investments for your current goals.

    Balancing a portfolio means sharing your assets between different categories of financial products. The right balance for you will reflect your attitude towards taking risks and your moneymaking goals. For instance, a portfolio designed to yield high payouts on the short-term would be balanced in a very different fashion from a portfolio designed to help you save for your retirement.

    Follow these steps to balance your investment portfolio:

    1. Start by defining your goals.

    Ask yourself how long you want to invest your money for, how much you can afford to add to your portfolio, and how much you would ideally like to get out of your investments.

    * Be realistic when it comes to establishing an ideal yield for your portfolio. For instance, aiming for a 7 to 8% yield is realistic if you're investing on the long-term and want to avoid taking risks.

    * A higher return can be considered if you're willing to dedicate a more significant portion of your portfolio to short-term investments with higher risks.

    2. Choose relevant investment types for your acceptable amount of risk.

    Bonds, some ETFs, stocks from well-known companies and even some types of equity count as conservative investments.

    On the other hand, investing in stocks or ETFs from emerging markets, most equity products, and foreign stocks include higher risks.

    * A very aggressive investor would diversify their portfolio between different types of equity products with a potentially high return.

    * A conservative investor would probably dedicate at least half of their portfolio to bonds with a fixed income.

    3. Be ready to take higher risks when you start building your portfolio.

    Diversify your portfolio by investing in different equity products and use your profits to gradually balance your portfolio towards more conservative investments.

    4. Adapt your strategy to the current economic climate.

    During a recession period, you can lower your risks by focusing on investments with a fixed income.

    On the other hand, the risks associated with U.S. or foreign stocks become lower when the economy is in good shape. This is why it is best to re-balance your portfolio on a regular basis.

    5. Balancing a portfolio takes time.

    Keep adding to your savings on a regular basis so you'll be able to add more types of financial products to your portfolio.

    * It is also necessary to keep track of how your portfolio is performing so you can assess whether or not your current balancing strategy corresponds to your goals.

    * If your portfolio is not performing as planned, you might want to change your behavior towards taking risks.

    6. Balancing a portfolio is not possible unless you understand risks.

    You can assess how risky an investment is by looking at how this financial product performed in the past. Look at the different factors that impact the value of a specific financial product to better understand how your potential investment is likely to evolve.

    * Getting some help from a financial advisor would be beneficial if you don't fully understand how to determine risks.

    Adding more financial products to your portfolio won't do you any good unless you follow a strategy. It's important for your balancing strategy to reflect your current goals and be adapted to the market.

    Keep in mind that you can build a stronger portfolio by re-assessing your balancing strategy regularly.