Simply a mix of individual company stocks and corporate and government bonds, however, may not give you everything you need to best manage risk and return. A balanced portfolio could also include a variety of nutrients and flavors.
Four Traits of a Balanced Portfolio
QUALITY
For your bond portfolio, you’ll want to consider diversifying across credit quality—such as Treasuries, investment grade and high yield—each of which has a unique risk/return profile. For stocks, you may want to focus on the quality of a company’s balance sheets and evaluate factors such as dividend growth, earnings or management.
GEOGRAPHY
It’s natural to have a home-country bias, and the U.S. is still one of the strongest markets in the world. But there’s no denying we live in a global economy. There can be real benefits to expanding your geographic horizon to pursue opportunities in other regions and countries. Try to have a risk-balanced blend of investments across developed and emerging markets so you’re well positioned globally. Also, keep in mind that the value of the dollar against other currencies has become more important to your bottom line lately. So consider whether some currency-hedged exchange traded funds (ETFs) may help to protect your portfolio against sudden changes.
SECTORS AND STYLES
Industries respond differently to different parts of the business cycle. For example, cyclical sectors, such as technology and discretionary consumer goods, generally benefit from economic upturns. On the other end, defensive sectors, such as food staples and utilities, are the last areas that people cut back on when times are tough. There are also certain styles of stocks to consider, such as value or momentum, and, for certain investors, some smart beta strategies may be an alternative to consider to help you access those styles. In short, cycles turn, so you probably want to make sure you’re not over-concentrated in one area.
SIZE
Everyone wishes they had invested in just the right tech company in the early 1980s, when the now-successful ones were just getting off the ground. But back then, who knew that personal computers would not only be in nearly every home like a TV, but might actually kick TVs to the curb? While it’s true that smaller companies can sometimes pay off big, they also carry higher risks. So you’ll want to consider a mix of small, medium and large companies. Many investors skew to the large side, unless you have the stomach for lots of ups and downs.
Stay Diversified Until the End
This may feel like a lot to manage, but it’s not as complicated as it seems. Many online resources and financial planners can break down your existing portfolio into a pie chart so you can see what slices you have. Then seek advice before making any changes.
If you’re just getting started, internet tools can help you create a diversified core portfolio. Or consider a core allocation ETF based upon your risk appetite and time horizon.
As you approach your goals, you may need to reallocate your holdings. But that doesn’t mean that you should be less diversified. Make sure you always have an appropriately balanced diet of investments.
Heather Pelant is Head of BlackRock Personal Investing for BlackRock. She is a regular contributor to The Blog.