Balanced Investment Strategy

A balanced investment strategy is a method of portfolio allocation and management, aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.

Although the balanced investment strategy aims to balance risk and return it does carry more risk than those strategies aiming at capital preservation or current income. In other words, the balanced investment strategy is a somewhat aggressive strategy, and is suitable for those investors with a longer time horizon (generally over five years), and who have some risk tolerance. Such a strategy would be appropriate for a younger investor, who has decades until she or he retires and no longer has a steady stream of income or salary. Perhaps the individual also has some experience with investments and understands the possibilities of losses and is willing to make calculated, well informed risks.

In a gradient of risk, a balanced investment strategy usually sits above current income and capital preservation strategies. Current income strategies seek to identify investments that pay above average distributions. Common types of current income can include dividends and interest. Current income strategies, while relatively steady overall, can be included in a range of allocation decisions across a risk spectrum. Strategies focused on income could be appropriate for an investor interested in established entities that will pay consistently (i.e. without risk of default or missing a dividend payment deadline) given their strong operations. These investors might be older and/or willing to take on fewer risks.

Preservation of capital is focused on maintaining current capital capital levels and preventing loss in a portfolio. This strategy works with safe, short-term instruments, such as Treasury bills and certificates of deposit. A capital preservation strategy could be appropriate for an older investor, looking to maximize her current financial assets and not take significant risks, which could put her retirement at risk.

Still, all three of these strategies sit below more aggressive strategies, such as a growth portfolio. A capital growth strategy seeks to maximize capital appreciation, or the increase in a portfolio’s value over the long term. Such a portfolio could invest in high risk small cap stocks, such as emerging technology companies, junk bonds (below investment grade), international equities, and derivatives. In general, a capital growth portfolio will contain approximately 65-70% equities, 20-25% fixed-income securities and the remainder in cash or money market securities. Although growth-oriented strategies seek high returns by definition, the mixture still somewhat protects the investor against severe losses.