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When you invest your money in various assets, you can create different kinds of portfolios. Some investors prefer an aggressive portfolio that focuses on high returns but also higher-risk investments. Others prefer a defensive portfolio that prioritises stability and capital protection over high returns.
A balanced investment portfolio falls between the two types and borrows strategies from each. Also called a ‘diversified portfolio’, this type of portfolio balances between risk and reward by combining a variety of asset classes.
A balanced portfolio is a great choice for investors who want to maximise returns while also reducing risk and creating long-term capital growth.
What is A Balanced Investment Portfolio?
A balanced investment portfolio is a collection of investments across different asset classes that combines both growth and defensive or income assets. The goal of having a balanced portfolio is to reduce risk while also creating capital growth.
Diversification of assets is the main principle behind a balanced portfolio. Having a diverse mix of investments provides a number of benefits:
- It mitigates risk by reducing your exposure to a specific asset class. So, even if one investment does poorly, your portfolio is not significantly affected, and gains in another asset can offset any losses.
- By mixing high-yield assets with lower-risk securities, a balanced portfolio increases potential returns while also providing stability and long-term growth. It’s the perfect sweet spot for many investors. You make money without losing sleep over your portfolio.
- A diversified investment portfolio is highly flexible, allowing you to adjust it to your risk tolerance, financial goals, age, and market conditions.
5 Tips for Creating a Balanced Investment Portfolio
1. Speak to an Expert
Consulting a financial expert may cost you a bit of money, but it’s a worthwhile expense when setting up the best-balanced investment portfolio.
Investing requires deep and extensive research, which takes up a lot of time you may not have.
A balanced portfolio has a wide range of assets, so the research is even more time-consuming. One moment, you’re looking into the best tech stocks on the ASX, analysing dense financial reports and trying to understand each company’s business. The next moment, you’re comparing private equity funds to find the best one to add to your portfolio.
It’s a lot of work, and you cannot afford to get it wrong. Speaking to an expert makes the process of building your portfolio a lot easier and less risky. An expert:
- Has the time and resources to research different kinds of assets for you. Chances are, they already have some of this information on hand.
- Can interpret financial reports and other documents to find useful information that is crucial in picking the right assets.
- Can help you pick assets that are tailored to your needs, risk profile, and stage of life.
2. Determine the Right Asset Allocation
Working with an expert will help you to determine the right asset allocation for you. We are not talking about specific stocks or funds here; that will come next. The first step is a broad allocation of your capital between defensive assets (e.g. corporate & government bonds, cash, and gold) and growth assets (e.g. stocks, private credit funds, and mutual funds).
The typical split for a balanced portfolio is 60/40: 60% of your capital is allocated to growth assets and 40% to defensive assets. The 60% portion provides growth potential, while the 40% portion maintains portfolio stability and long-term income.
You don’t have to stick to this formula; your specific allocation can vary to suit your goals, risk profile, and age.
For example, if you want less risk or you’re nearing retirement, you can flip the ratio (40% growth, 60% defensive) to create a more conservative portfolio that focuses on stability and income.
If, on the other hand, you’re young and don’t have a lot of expenses, you can be a bit more aggressive and choose a ratio like 75/25.
3. Choose Assets for Your Portfolio
Once you’ve determined your appropriate asset allocation, you can narrow down and pick individual assets to add to your portfolio.
For your growth allocation, you’ll need to pick specific stocks and funds. The same goes for your defensive allocation; you’ll need to choose between different kinds of bonds and find a bank with good term deposit rates to save some of your cash.
Even within these specific assets, there is a wide variation in terms of potential returns and amount of risk, so you need to make your choices carefully to ensure they align with your balanced investment portfolio.
For example, blue-chip stocks are more defensive than stocks of newer, unproven companies. When it comes to funds, some private equity funds have a more aggressive investment strategy than others.
As you choose your investments, keep the 5% rule in mind. Do not have more than 5% of your total portfolio value on a single investment, like a particular stock or fund. This limits your risk exposure and ensures your portfolio doesn’t take a big hit when any of your investments underperforms.
4. Monitor Your Portfolio to Maintain Diversification
You’ll need to rebalance your portfolio to maintain your asset allocation occasionally. Investment weightings (what percentage of your portfolio is allocated to specific assets) vary as the market value of your assets fluctuates.
So, the asset mix you may have started the year with may not be the same one you have at the end of the year. Say you invested $100,000 in stocks and bonds in a 60/40 split. By the end of the year, maybe your stocks have performed well, and your $60,000 worth of investment is now worth $75,000. Let’s say your bonds had a more modest increase of just $2,000 to $42,000.
Now, your portfolio is more weighted towards stocks (65%), which reduces diversification and increases your risk exposure to the stock market. You can opt to sell off some of your shares or increase your investment in bonds to rebalance your portfolio.
5. Make Adjustments to Your Portfolio
As you age and get closer to retirement, your portfolio balance will likely need to change, usually towards a more defensive/conservative balance.
But it’s not just age; starting a family, changes in market conditions, or a shift in your risk tolerance are valid reasons to make adjustments to your portfolio.
Create a Balanced Portfolio With PSA’s Private Credit Fund
At PSA Capital Investments, we offer access to a private credit fund that fits perfectly into a balanced investment portfolio. Our defensive investment strategy and a diverse investment portfolio across a wide range of borrowers and industries ensure consistently high returns and low risk.
Ready to explore how the PSA private credit fund can fit into your portfolio? Contact us today on (03) 9847 7689 to learn more.
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
