Balanced Investment Strategy
Candlefocus EditorStocks are typically preferred for their ability to outperform cash and other fixed income instruments, but their price can be volatile, and investors may experience losses. Bond investments provide steady income, bought and held to maturity, they guarantee the return of principal. As such, they may be suitable for those who are nearing retirement and seeking an income stream to supplement Social Security and other retirement income.
The combination of stocks and bonds provides downside protection while also offering potential upside potential. The goal of any balanced investment strategy is to capture the upside potential of stocks while also reducing the volatility and downside risk.
To actualize a balanced strategy, investors will choose investments in both stocks and bonds that meet their particular risk tolerance and time horizon. A combination of large-cap, mid-cap and small-cap stocks can provide equity exposure and provide the potential for growth in different types of companies. Bond investments should then be chosen to complement the stocks. Short-term bonds can provide a conservative return that, maturing at regular intervals, could be reinvested to take advantage of rising interest rates. Longer-term bonds offer greater yields but also higher risks as rates might move against the bondholder.
Investment vehicles such as Exchange-Traded Funds (ETFs) can also be used to construct a balanced portfolio. For example, a target-date retirement fund can provide a diversified portfolio based on the investor's retirement goals and risk tolerance. These funds automatically rebalance over time to ensure the investor remains in alignment with the intended risk and allocated returns.
Overall, a balanced investment strategy offers a compromise between safety and potential return. Through diversification, downside risk is mitigated, while upside potential is maintained. It can be suitable for most investors, whether they are just starting out or nearing retirement, and provides a valuable option in a diversified portfolio.