Keeping a Balanced Portfolio
Whether you are brand new to investing or you have an established portfolio, balance is seen as one of the keys to making the most of your investments. But what does a balanced portfolio look like? And how do you keep your portfolio consistently balanced? Here are the dos and don’ts of balancing your portfolio and some helpful tips to potentially increase your returns.
Do: Aim to Have a Mix of Assets
At its most basic level, balancing your portfolio means investing in a diverse mix of assets. But this mix might look different for every person depending on their specific financial situation, risk tolerance, age, and investment goals.
Most of the time, investments are a mix of stocks and bonds. Stocks are considered higher-risk investments because they can be very volatile, while bonds are considered lower risk.
Don’t: Set it and forget it
The secret to making your portfolio work for you is to make sure it stays balanced. The value of investments fluctuates over time, so it’s important to make sure you are rebalancing your portfolio on a regular basis. Take a look at your investments about once per year and make sure their value still matches your desired balance.
Here is an example: You have 70% invested in stocks and 30% invested in bonds. Over the course of five years, the stock market value has doubled, but the value of the bond market has only increased marginally. Your stocks are now worth 85% of your portfolio while the bonds are only worth 15%. You may want to rebalance the portfolio to align it with your target allocation of 70% stocks and 30% bonds.
Do: Rebalance yearly
There are a few different ways to rebalance your portfolio. One way is to sell and rebuy assets according to your balance needs. The potential downside to taking this approach is that you could be selling your best-performing assets in favor of lesser-performing assets.
To avoid selling your best assets, the other method to rebalancing your portfolio is to invest new funds into assets. This way, you can keep your high-performing investments and add to the investments that are causing the imbalance in your portfolio instead. Investing more funds into your accounts is one way to grow your portfolio’s value over time.
Don’t: Keep the same balance over your lifetime
The other advantage of reevaluating your portfolio balance yearly is that you have the chance to change your goals and investment strategies. Whether you’re getting ready to buy a house or preparing for retirement, you’ll always have different financial goals to reach. While a higher-risk investment portfolio may work during certain phases of your life, there may be times in your life when you want to take a more conservative approach.
Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes.*