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What is a well-balanced portfolio?

I always hear that my portfolio should be diversified/well-balanced. But what does that actually mean? I'm married and in my early 30's, no kids. What would a diversified portfolio look like for me? How is that going to change as I get older/have a family?

Apr 02, 2012 by Lavinia from Bowling Green, KY in  |  Flag
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14 votes
Bob Rall, CFP® Level 12

Hi Lavinia, A well-balanced portfolio means that you have your assets distributed across several different asset classes to avoid the "all your eggs in one basket" problem. By diversifying across asset classes, you can reduce the risk of your overall portfolio. The goal is to own assets that are uncorrelated, meaning that they don't move in the same direction or the same degree. For example, when stocks go up, bonds typically go down and vice versa. My client portfolios are well-balanced with a mix of US stocks (large and small companies), International stocks (developed and emerging markets), real estate, commodities, short and intermediate term fixed income (bonds). I hope this helps. Good luck to you.

Comment   |  Flag   |  Apr 02, 2012 from Merritt Island, FL

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11 votes

Hi Lavinia,

You have no idea how much an advisor likes to hear the correct question framed the correct way. What would a diversified portfolio look like for me? Awesome question, so many people ask, "What is a good investment?” It is not about one investment it is about what mix of investments and what percentage allocated to each category. Everybody is different and their risk tolerance is different. In my opinion a well diversified portfolio is invested in 7 to 12 categories; Large, medium and small cap stock both domestic and international as well as value and growth. Real estate, commodities, emerging markets as well as short and long in duration and high and low in quality bonds. With this current economic environment and the Feds printing money I would also include inflation protected bonds. Based on your age unless you are a very risk adverse person I would say a 70 % equities and 30% bonds portfolio could be appropriate for now. The key is to rebalance your portfolio at opportune times as well as slowly reduce risk over the years as you approach retirement. Most people make their mistakes by being too conservative when they are young and then once they become more comfortable with how the market works they tend to want to take on too much risk when they are older and do not have time to make up for a black swan type of event if it were to happen. Let capitalism work for you. Invest appropriately for your age and risk tolerance. Please feel free to contact me if you need an advisor.

Comment   |  Flag   |  Apr 02, 2012 from Loveland, OH

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Hi Lavinia, a well-diversified portfolio is an excellent way for you to save for retirement as well as other goals. Here's a link to a blog post I wrote that may give you a lot more information about how to build a truly diversified portfolio: http://integrityplanner.wordpress.com/2012/01/19/the-4-x-14-portfolio-tm-updated-for-2011-returns/ .

How the asset mix of a portfolio changes over time often depends on the purpose of the portfolio. For instance, in your 30s, you have a few decades to save for retirement and then a few more decades to live in retirement. So a retirement portfolio asset mix won't change much in your 30s, 40s and 50s.

But a college fund for a child will change more quickly, since you may have only 1-2 decades or so to invest and grow that type of portfolio.

Mike

Comment   |  Flag   |  Apr 02, 2012 from Orland, IN

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8 votes

A diversified/well-balanced portfolio is in most cases the best solution. Your portfolio should include multiple asset classes. Typical asset classes include large and small capitalization stocks, international (developed and emerging markets), fixed income (domestic and international) and in many cases commodities and/or real estate. The reason a well diversified portfolio is often the best solution is based on the fact that each asset class has different risk and return characteristics. Balancing the risk and return characteristics provides a better overall investment experience (think hitting singles versus homerun/strikeout). As an example, the media often discusses the “lost decade” in which the S&P 500 was flat for 10 years. A well diversified portfolio did not suffer that fate. Your portfolio should be based on your financial/life goals. Your goals today (30’s, no kids) will undoubtedly change as your life changes. Your time horizon will change as will your risk tolerance level. As you review your goals – today or sometime in the future – combine asset classes that provide a high likelihood of achieving your goals with the minimal amount of risk needed to do so.
As an example, suppose you want to retire at age 60 and this is your only goal. You could review various portfolio allocations (well – balanced) to determine which allocations (percent stock and bond) would have achieved your goal. If uncomfortable using historical returns, you can use other assumptions. Next, review the worst annual return of the various allocations. Does the worst year return frighten you? Would you abandon your plan if that happened in the future? With that information in hand, you can begin the process of building a portfolio/financial plan based on your needs and goals. You should repeat this process as you move through life. It is fair to guess you will have different goals if children become part of your picture and your risk tolerance may change as you close in on retirement age. Good luck. Thank for the question.

Comment   |  Flag   |  Apr 02, 2012 from Phoenix, AZ

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7 votes

Hi Latvina..All the answers given are good. I might add that in any portfolio used for retirement saving you should know two numbers, expected return and expected volatility. Without these two numbers you are speculating with your retirement savings. Your portfolio should be globally diversifed which is risk adjusted for your time horizon to retirement. Seek the guidance of a professional adviser who follows the fiduciary standard.

1 Comment   |  Flag   |  Apr 02, 2012 from Green Bay, WI
Edward Smith, ChFC, CRPS, AIF

Yes, Tony I agree. I was trying to be a little generic not knowing how advanced Lavinia is in her understanding of standard deviation and things of that nature. It is funny how people want a certain return but are unwilling to accept the expected volitility for the portfolio required to reach that goal. They both go hand in hand. Great point.

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Flag |  Apr 02, 2012 near Loveland, OH

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