Balanced Investment Strategy

Attempting to achieve a balance between the return and risk of a portfolio, a balanced investment strategy is implemented.


What Is a Balanced Investment Strategy?

A balanced investment strategy aims to create a healthy portfolio for an investor by balancing its risk and return. A balanced portfolio is mainly divided into multiple asset classes. The division may be equal or with a slight tilt, such as 70% in stocks and 30% in bonds. Another key factor of a balanced portfolio is that it may contain a small cash component to be liquidated upon need.

The strategy is implemented by distributing the investment money in high and low-risk assets with the idea that high-risk assets will bring the highest returns, whereas low-risk assets will offer the minimum risks. 

Low-risk investing mainly focuses on the preservation of capital and current income but not a lot on capital growth. These are low-yield investments generally considered to be safe, such as investment bonds, certificate of deposit, blue-chip stocks and money market instruments High-risk investing, on the other hand, is primarily concerned with capital growth and is based on aggressive strategies that typically involve investments in heavily weighted stocks. 

Understanding Balanced Investment Strategy

A balanced investment strategy has many benefits to offer investors. Firstly, it empowers investors to make a profit when the market is in an uptrend, without having to risk everything. Investors achieve this balance by having moderate investments in both high-risk and low-risk assets. 

A balanced investment strategy can often be referred to as an aggressive strategy, however, it remains to be a safe investment option since it guarantees capital retention for investors.

A balanced investment strategy lies somewhere in the middle of high and low-risk investments – a fine mix of an aggressive and a conservative investment strategy. 

Balanced Investment Strategy vs Capital Preservation

A fair comparison can be made between a balanced investment strategy and other strategies that experts, portfolio managers and investors use for the optimum allocation of funds in a portfolio. 

The current income strategy involves the selection of investments offering returns higher than the average capital returns. It focuses on deriving income from a portfolio, which might as well be in the form of interest or dividends. 

Capital preservation is another strategy that guarantees loss prevention and a capital return in the portfolio, helping investors to maintain a good capital level. These strategies are neither risky nor aggressive, unlike growth-oriented strategies, which aim to increase the value of an investment over a fixed time period, resulting in a high capital return in an aggressive manner.

What Are Balanced Funds?

A mutual fund that invests in both high-risk and low-risk asset classes in a single portfolio is known as a balanced fund. These funds strike a balance between debt and equity, hence the name balanced fund. These funds generally stick to a relatively fixed mix of investment bonds and stocks. They are mainly directed towards people having low-risk tolerance, aspiring to have a side income or a modest appreciation of their capital, such as retirees.

Since balanced funds allocate a fixed set portion to bonds and stocks, they provide diversification within a single portfolio. The only challenge is that the fees are higher than index funds at times, even outweighing the advantages of a balanced mutual fund. Therefore, a similar balanced strategy can be implemented by adding index funds or several mutual funds in a single portfolio for a relatively lower cost on the whole.

What Are Target-Date Funds?

A target-date fund differs from balanced funds in such a way that it is designed for people who plan on retiring at a specific age. These funds are not based on a fixed plan or divisions. The allocations within the fund change over time, becoming more conservative as the plan progresses, gradually diverting a larger percentage of investment towards bonds instead of equities. They can be thought of as a tailor-made investment plan mainly for retirees, making the investment more and more conservative as time passes by.

A sensible approach is to have the majority of the savings in a balanced fund. Another preferred approach is investing in a target-date fund since the allocations change as the investor becomes older. However, a few main advantages of investing in a balanced mutual fund are that they provide diversification and are less volatile. While the downside is its high fees and reduction in returns over time.

Balanced Funds Are Less Volatile

Even though a balanced mutual fund generates lower capital returns as opposed to all-equity funds, it is still considered to be the safer option because the returns of a balanced mutual fund are mostly less volatile. In most cases, a greater percentage of capital is invested toward low-risk assets that generate more stable and less volatile capital returns with modest appreciation.