So, first, let me explain what balanced investment entails. Why would someone make such an investment?
What is Balanced Investing?
A balanced investment often refers to a medium-risk portfolio, and most mutual funds will hold a combination of stocks and bonds.
A balanced investment strategy seeks a balance between capital preservation and growth. It is used by investors with moderate risk tolerance and generally consists of a relatively equal mixture of stocks and bonds. Balanced investment strategies sit at the middle of the risk-reward spectrum.
Why Would Someone Choose Balanced Investing?
The main reason is for those investors who don’t like to see much volatility in their portfolios and are not comfortable having a 40 percent portfolio drop when the stock market crashes.
An investor will use balanced funds for healthy growth and supplemental income. They will make a lower return but, in the long run, will see no more than 15 or 20% drops in their portfolio. It is still quite significant, but they will also see some growth.
When considering balanced funds, the question is, what fits your risk tolerance? A balanced approach might be more appropriate.
Stocks Vs. Bonds
Companies own stocks. They are an investment that’s supposed to grow. If you own stock in Google, you expect it to grow and appreciate. If the stock market crashes, it’s a 30% loss, compounding the risk. You will balance this risk by adding typically safer components to your portfolio: bonds.
Bonds are essentially IOUs. You give a thousand dollars to the Canadian Government or a utility company, giving you a particular return for X years, its three-year investment with a 2% yield. All that means is you give them a thousand dollars. They give you two percent a year for three years. That is considered to be safe. It gives you a little bit of income and stability.
Bond values can fluctuate as well, especially in a low-interest environment. As interest rates go up, bonds fluctuate down.
Nevertheless, bonds are a good diversifier and a simple, balanced investment approach in the long term. If you hold them to maturity, they will give you your money back.
How Stocks and Bonds Work For You in The Long Term
The combination of a balanced fund would typically be 50-50 or 60% percent stock and 40% bond allocations. The upside of this combination is when stocks rise. Stocks generally increase faster than bonds, stocks gain 10% over any given year, but bonds only increase by 3%.
If you started with a 50/50 portfolio at the end of the year, it would no longer be a 50/50 split because of rising stocks. That means you are now taking more risks than you signed up for. In a balanced portfolio, you don’t want more than a medium level of risk.
As stocks grow, you take on more risk. And so, what a typical balanced portfolio will automatically do is sell some of the stocks and buy some of the bonds. Essentially you’re always going to be selling the thing that has grown.
So you’re going to be locking in some gains and buying something a little bit lower, and that’s what you want. The concept is called Rebalancing. You balance your portfolio to get back to what you started with and guarantee success in the long term.
A Final Word
This is how balanced investing helps you in the long run. If you don’t want the instability of a high-risk profile, then a balanced approach is the way to go as you grow your portfolio. Your options will increase for the stock equity, or growth side and fixed income side, in place of or in addition to bonds. A balanced, basic portfolio is a great place to start as an investor.
Contact us at Grow Your Wealth to discuss all your Balanced Investment needs!