How to Have a Healthy and Balanced Investment Portfolio | FinanceCashTip

How to Have a Healthy and Balanced Investment Portfolio

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The advantages to having a balanced investment portfolio will ultimately mean having a healthy selection which will serve you well into the future. Many investors take an ad hoc approach to their investing — that is if there’s been any planning at all. It is important to take a more structured approach and to plan.

Many consider having a portfolio means having a savings account, a retirement account and a bank account. Afraid of taking on risk they stick to the sorts of investment that will never keep up with inflation. While you may want your savings to be safe you also need it to grow. The challenge of course is that the safer your investments are the less likely you will make the money you require to grow your funds.

This is where balanced investing comes into its own. You will have heard that you should spread your investments and not put them all in ‘one basket’. The reason for this is that each type of investment asset class will react differently to different market situations. If you have your investment s in one area only you are subject to the declines in that market.

Take for example housing. The recession and bad lending practices affected home owners and business owners alike, resulting in the value of their properties falling. An investment only in property would mean that you had little else to boost your value. Property markets are notoriously illiquid investments and if you needed cash you would need to sell at a loss.

Then let’s look at the share market (equities). Investing in one company would mean you would lose all of your money if the company were to fail. Investing in a few different company shares would provide a little more security against a decline in the markets.

The best way to get that reduction in risk is to spread your investments and diversify. There are four main categories of investment and these are known as asset classes. These categories are cash, fixed interest, property and shares.

Cash gives the lowest return but is arguably the safest asset class. It is good to have cash for liquidity but its risk is that it will not keep up with inflation. In some cycles of the investment market interest rates have been attractive and have given better returns than the traditional riskier shares…but over time they will lose money by not providing growth. Cash is good for your short-term goals.

Fixed interest is next in line on the risk scale.Fixed interest assets are generally government bonds, issued by governments the world over to raise cash for public spending. Companies also issue bonds to raise capital. Government bonds tend to be seen as safe as they are guaranteed to pay back the funds borrowed on due date. However, this Sovereign debt is not as safe as it once was with many countries striking problems during the recession. Corporate bonds tend to provide higher returns than Government bond and are more secure than shares in a company.

Until recently investors tended to think of property as ‘safe as houses’ and that it always went up in value. This of course is not always the case as we have seen in recent times. Property is harder to diversify in as a lot more cash is required for their purchase. Borrowing magnifies the risk. There are ways of investing in property through managed funds. Property is a long-term investment and the returns from property are growth in value or rent from your rental investments, which is income.

Shares (or equities) are the riskiest of the four assets classes and it is important to invest in a range of companies and not just the one. Shares are growth investments but returns can be made up of dividends also.

A balanced portfolio is a mix of these assets in a combination that is roughly 50% growth and 50% income. It is a portfolio for those who are adverse to risk but require growth in their investments. By combining these assets your return is the average of the highs and lows, smoothing out the volatility of the market.

Have a healthy portfolio by adopting a balanced approach to your investments. Ask your adviser or financial planner about the right investments for you.

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