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The Benefits of a Balanced Portfolio

| Edward H Zumstein

Like putting all of your eggs in one basket, allocating the bulk of your investments to any single asset class can be dangerous. Investors who diversify their portfolios can mitigate risk and limit the impact of market volatility on their assets.

Part of an overall, long-term financial plan, a balanced portfolio is intended to generate steady growth and income while preserving capital and yielding the optimum return on your investments. Portfolios also need to be re-addressed and rebalanced over time. Changes in the market or your life situation can influence how you allocate your assets.

A successful investment strategy isn’t about which individual investments you own, but rather about how much you have in each asset class and how that diversification helps you meet your financial objectives.

The right asset mix

Before you can determine whether you have the right mix of investments, you need to know where you stand. Start by making a list of all of your accounts and the current balance or value for each. Most will fall into one of four primary asset classes: stocks, bonds, cash or real estate and commodities.

Stocks, also known as equities, indicate shares of ownership in publicly held companies. Risker and more unpredictable than other asset classes, stocks also can prove more lucrative. Stocks can be your best financial performers, but a portfolio that’s too stock heavy can take a beating during a market downturn.

Assets such as CDs, money market accounts, Treasury bills (also called T bills) or any account with near-term liquidity is considered a cash asset. Both risks and interest rates are low, but cash can be important to achieving a balanced portfolio. With bonds, the investor is lending money to a corporate or government entity for a set period of time at a fixed interest rate. One well-known example is U.S. savings bonds. Like cash-based assets, bonds tend to be low risk and modest reward.

Real estate investment involves buying, owning, managing, renting or selling property for profit. With limited liquidity compared to other investments, this asset class is capital-intensive and highly dependent on cash flow. Risks can be high and may include property value fluctuations and environmental hazards. If real estate is part of your portfolio, experts advise picking your investment model and finding the property that fits your plan, not the other way around.

Commodities are related to food, energy or metals that are important parts of everyday life. They offer a number of advantages for investors and can be a good way to diversity beyond stocks and bonds. Investors can make big profits when they are on the right side of a trade – or lose their initial deposit and more if they are not.

Where is your money?

Once you have your list, determine your current balances and how much you have in your various asset classes. Some experts recommend having as much as 70 percent of your portfolio in stocks. Other break the numbers down even further, specifying percentages of domestic and foreign stocks or large-cap (large market capitalization) and small-cap funds.

In the end, the right mix is what makes you comfortable and helps you achieve your financial goals.

The Benefits of Balancing

Maintaining a balanced portfolio keeps you in control. Diversifying among and between asset classes diminishes your risk and improves long-term profitability. And while you need to stay true to your investment plan, you also should re-evaluate and rebalance your portfolio periodically.

American Financial Advisors

Are you looking to begin your portfolio or re-examine your existing assets? Our well-seasoned Investment Advisor Representatives at American Financial Advisors are ready to assist you. Give us a call today to see how we can get started.


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