How to Create a Balanced Investment Portfolio
Anyone who takes money and invests must create a well balanced investment portfolio to minimize the risks while maximizing the potential gains. A balanced investment portfolio allows your money to grow with minimal problems and a lower risk of major losses. A poorly balanced portfolio has the potential to lose everything if one or two investments suddenly drop or even go bankrupt.
1. Determine what type of investment strategy you prefer to pursue. While a well-balanced portfolio requires investing in various types of investing opportunities, you must determine how to allocate or distribute funds in the portfolio. In general, older investors should put less money in risky investment options while younger investors can put larger amounts of money into riskier investments like stocks. Personal risk tolerance is another factor involved in allocation and strategy. If you feel uncomfortable with the idea of a 20 percent drop during a down market, you should not invest too much in stocks.
2. Research all of the investment opportunities before putting any money into it. Never buy a stock, bond or any other type of investment without looking into the company policies and the historical success or failure of a company. Have a few different investment options in mind and then find out more about the way the company works, the company’s policies and the historical trends of success or failure within the company.
3. Diversify stock purchases. A balanced portfolio always diversifies to hedge potential risks. Diversification means buying stocks in different areas. For example, if you buy a technology company’s stock, you should also
buy stocks in other companies that are not related to technology such as pharmaceuticals or financial companies. Buying a variety of different type of stocks will lower the risk of the entire portfolio dropping. If you need information or help with this,
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4. Purchase some fixed income securities. U.S. Treasuries, municipal bonds or any other types of bonds are less risky than stocks, which makes them an important part of a balanced investment portfolio. Bonds do not rise as quickly as stocks, but they also do not fall as quickly or as far as stocks. Buy a few different bonds for the portfolio to provide diversity. When selecting bonds, expect a lower return for anything with less risk.
5. Invest in mutual funds rather than stocks. A mutual fund is several stocks in specific categories. For example, a technology fund owns the stock of several technology companies. Funds are not quite as risky as investing in the individual stocks, but they tend to go up and down with the market trends. When buying funds, buy a few different types to spread out the risks.
6. Put some money into emerging markets. Buying some emerging market funds or stocks further varies the portfolio risks by investing in several different countries. If the market in one country goes into a recession, other countries do not necessarily follow.
7. Invest in real estate. Real estate is the investment in housing or buildings. It is not necessary to purchase a house to invest in real estate. Instead, put some money into a Real Estate Investment Trust, or REIT. REITs are a type of fund that focuses solely on real estate. They are bought and sold like stocks, so they are part of the investment portfolio, but the money is backed with property and is a great diversity element for any portfolio.
8. Buy gold. Gold is an excellent addition to any portfolio because it is an investment in a commodity. As the price of physical gold increases per ounce, the price of gold stocks also increases. You can buy gold directly by purchasing gold stocks or you can invest in gold mining companies. If you put money into the gold mining companies, the price is based on how well the company performs. Investing directly in gold bases the price on the cost of gold per ounce.
9. Buy some foreign currency. Like gold, investing in foreign currency helps hedge inflation risks. It is also another way to minimize the risk of investing in a single country and provides another element of diversity.