Balancing Out Your Investments: A Portfolio Worth Having

Investment strategies are dependent on the allocation of resources toward various financial instruments.  The main asset categories include commodities, stocks, bonds, cash holdings, real estate, indices, forex, and each is associated with its own risks and benefits. Certain asset classes like forex and stocks are subject to whipsaw activity in the financial markets. Others, like bonds and real estate, are considered more stable.

When setting up an investment portfolio, it’s important to balance out high-risk, medium-risk, and low-risk investments to achieve the optimal mix of financial instruments. The hope is that volatility in equities and forex will be smoothed out by the stability and long-term growth potential of real estate holdings and bonds. Asset appreciation is heavily dependent on striking the right ‘balance’ between various components.

Understanding Strategic Asset Allocation

The concept of strategic asset allocation encompasses multiple elements. These include diversification according to sector, size, physical assets and the investment timeframe under consideration. This overarching strategy is important when determining your long-term goals from your investments. Since investments in all assets are inherently risky at some level, investors need to factor this into the decision-making process. Market behaviour is cyclical – it trends bullish and bearish. Successful investors are better poised to ride out the volatility for long-term gain.

Assets are divided up into various sectors. According to expert analysis, there are 4 broad sectors available to clients. These include intellectual assets, service assets, manufacturing assets, and natural resources. Further subdivision of these main asset categories is common, such as when broken up into broad industry classifications like materials, industrials, consumer staples, consumer discretionary, real estate investment trusts, utilities, technology etc. Nowadays, digital currencies such as Bitcoin, Ethereum, Litecoin, Ripple, Dash and 1,500+ others have opened up whole new asset categories for investors. These are currently extremely volatile assets.

The best investment strategy is one that diversifies asset holdings across multiple sectors. This guards against the inevitable rotations, corrections and collapses that characterize a market in the constant process of change. Experienced investors tend to limit their exposure to any single investment device through diversification by purchasing shares of an investment fund that represents a basket of different securities and assets. Many such funds exist, including mutual funds, which are professionally managed investments portfolios, index funds, which are generally passive investments pegged to a particular market index, and exchange traded funds, otherwise known as ETFs, which are similar to index funds but can be traded like regular stocks. Funds tied to indexes are a popular option for many investors, since they are better designed to smooth over the volatility of individual components of the index. By investing in the broader market, you can hedge against the volatility of single assets.

Why Is It Important to Assess Your Investment Timeframe?

As an investor, you always want to clearly delineate the investment horizon. An investor who is near retirement, is unlikely to require a 20-year timeframe for assets to appreciate. As such, that investor will likely take a more short-term focus to asset diversification. This might include rotating money into less risky assets, such as blue-chip stocks, mutual funds, and stable commodities.

If you’re planning your retirement around your investment portfolio, it’s important to take several factors into consideration, including: how much you need to live, what will the inflation rate be, when you want to retire, and so forth. Your financial goals determine your investment paradigm. It is important to diversify your portfolio as much as possible to ensure that you can hedge against volatility (whipsaw movements) and grow the value of your financial assets over time.