Balanced Investment Strategies

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.

BREAKING DOWN Balanced Investment Strategy

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.

Balanced Investment Strategy versus Capital Preservation, Current Income, and Riskier Growth-Oriented Strategies

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 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.

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.

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.

Balanced Asset allocation is the strategy of dividing your investment portfolio across various asset classes like stocks, bonds and money market securities. Essentially,asset allocation is an organized and effective method of diversification. Your options typically fall within three classes: stocks, bonds and cash.

Strategic Asset Allocation is a portfolio strategy that involves setting targetallocations for various asset classes and rebalancing periodically. The portfolio is rebalanced to the original allocations when they deviate significantly from the initial settings due to differing returns from the various assets.

Tactical Asset Allocation (TAA) is a dynamic investment strategy that actively adjusts a portfolio's asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing.

Smart Beta Rebalancing

Smart beta  rebalancing is a type of periodic rebalancing, similar to the regular rebalancing that indexes undergo to adjust to changes in stock value and market capitalization. Smart beta strategies take a rules-based approach to avoid the market inefficiencies that creep into index investing due to the reliance on market capitalization. Smart beta rebalancing uses additional criteria, such as value as defined by performance measures like book value or return on capital, to allocate the holdings across a selection of stocks. This rules-based method of portfolio creation adds a layer of systematic analysis to the investment that simple index investing lacks.  

Although smart beta rebalancing is more active than simply using index investing to mimic the overall market, it is less active than stock picking. One of the key features of smart beta rebalancing is that emotions are taken out of the process. Depending on how the rules are set up, an investor may end up trimming exposure to their top performers and increasing exposure to less stellar performers. This runs counter to the old adage of letting your winners run, but the periodic rebalancing realizes the profits regularly rather than trying to time market sentiment for maximum profit. Smart beta can also be used to rebalance across asset classes if the proper parameters are set. In this case, the risk-weighted returns are often used to compare different types of investments and adjust exposure accordingly.    

Steps to Building a Complete Financial Portfolio

Before you Begin Building your Complete Financial Portfolio do the following:

  • Contribute to Your 401k with Your Employer's Matching Funds.
  • Pay Off High-Interest Credit Card Debt.
  • Open and Fully Fund a Roth IRA.
  • Purchase a Home.
  • Build a Six-Month Emergency Reserve.
  • Pursue Other Investment Opportunities.
  • Invest in Yourself.

The Truth About Index Investing

You may have heard debate about the relative merits of "passive" vs "active" investing. "Passive" describes investments such as exchange-traded funds (ETFs) that aim to match the returns of an index that tracks a given part of the market (also known as "indexing"). "Active" refers to funds that attempt to beat their benchmark index.In fact, this debate is mostly a moot one. Indexing is far from passive, and active funds may not always deliver. Here are 4 things to keep in mind:

  • ETFs are generally cheaper, and can outperform active stratifies. ETFs cost less on average because it’s cheaper to track an index than to attempt to weed out the winning stocks and bonds from the losers. Lower operating and trading costs are passed on to you, the investor. The savings can be significant. iShares ETFs, for example, are 1/3 the cost of a typical mutual fund1. ETFs are also more generally tax-efficient: the average tax cost for iShares ETFs is half that of active mutual funds.


  • Investors can use ETFs to access nearly any Market. With over 2,000 ETFs on the market, investors can use ETFs for almost any investing need: stocks, bonds, commodities, specific sectors, countries or regions.There are also ETFs that seek to deliver specific outcomes, like generating income or reducing risk. And factor, or "smart beta," ETFs provide cost-effective ways to invest in, say, value or growth companies, similar to a value or growth mutual fund.
  • Under the hood, every ETF is unique. Two different ETFs with similar names are like fraternal twins – close, but with surprising differences. If you’re looking at multiple ETFs with similar descriptions, take a closer look at their performance over time, annual expenses, tracking accuracy, tax costs, trading costs, and other characteristics to find the right choice for you.
  • ETFs have real-life portfolio managers who work to ensure the ETF tracks its index efficiently. ETFs are not managed by machines, but by flesh-and-blood portfolio managers, who update holdings as the fund’s index changes and monitor the portfolio to make sure it tracks its index efficiently. 5. "Passive" funds don’t equal passive investing
Dividends and compounding gains vs capital gains from equities. What is total returns?

Dividends have historically played a significant role in total return, particularly when average annual equity returns have been lower than 10% during a decade. Stocks in the highest quintile of dividend yields have historically underperformed stocks in the second quintile. Therefore, investors should only use yield as one consideration when selecting a dividend-paying investment. Furthermore, dividend growers and initiators have historically provided greater total return with less volatility relative to companies that either maintained or cut their dividends.

Steps to Building a Complete Financial Portfolio

A complete financial portfolioa term I use to define an individual who has fully-funded retirement accounts debt-free, has a six-month emergency cash reserve, owns diversified investments across different  asset classes.

Contribute to Your 401k with Your Employer's Matching Funds. In 401k Retirement Plan: Begin Building for Your Future, you learned that many businesses match contributions employees make to their 401k accounts. The amount of these matching contributions can vary widely from company to company; most providing an escalation in benefits based upon tenure. Yet, despite this free cash, some individuals do not take advantage either because they don’t understand the time value of money or don’t believe they can afford to have their take-home pay reduced.

The fact is you can’t afford not to contribute. If your employer matches $1-for-$1 up to the first 5% of your contribution, you are immediately earning a 100% return on your investment. There is no investment in the world that can guarantee returns even close to that amount.When you consider these funds will also grow tax-deferred in your 401k for the next twenty, thirty, or forty years, the opportunity cost over a career can be millions of dollars!

The bottom line: even if you are buried under a mountain of credit card debt, can’t pay your monthly bills, and have your telephone disconnected, you must contribute to your 401k up to the amount of your employer’s match.

In addition, open and fully fund a Roth IRA.

The Roth IRA is, in our opinion, the greatest financial account available to investors in the United States. The odds are good you qualify; as long as your annual income does not exceed $95,000 (single) or $150,000 (married), you can open a Roth IRA.

Contributions (subject to annual limits) are made with after-tax dollars. All Roth IRA contributions can be withdrawn at any time without any penalty. Once you reach the age of 59 1/2 (subject to the five-year rule), all withdrawals are absolutely, 100% tax.

You can open a Roth IRA at any bank or brokerage firm.

Build a Six-Month Emergency Reserve

This allows you to weather any unexpected storms including home repairs, unemployment, and medical bills. At the very least, the emergency cash reserve should be sufficient to cover up to six months of base expenditures and emergencies.

Investing Your Emergency Cash Reserve

If you are interested in generating extra income, consider building a laddered certificate of deposit portfolio for emergency cash reserves.Assume your emergency cash reserve is $12,000. You would go to your local bank and open six certificates of deposits (CD's) as follows:

    • $2,000 30 day (1 month) maturity
    • $2,000 60 day (2 month) maturity
    • $2,000 90 day (3 month) maturity
    • $2,000 120 day (4 month) maturity
    • $2,000 150 day (5 month) maturity
    • $2,000 180 day (6 month) maturity

Stay the Course

The key to success is making intelligent decisions and sticking to the basics of the complete financial portfolio. There is nothing magical about wealth building; it is achieved through a culmination of small, disciplined, choices. To borrow a line from the important book The Richest Man in Babylon, you must keep your mind on the bigger goal to “protect your true wants from your casual desires.”

You must build the right asset mix and avoid a hodgepodge that won't achieve your retirement goals.

Despite what many Wall Street firms and advisers may suggest, you don’t need to stock your portfolio with an ever-expanding array of funds and ETFs to navigate today’s global financial markets. In fact, such a portfolio may do more harm than good.

It doesn’t take a lot to reap the benefits of diversification. Over the 20 years to the end of June, for example, a simple mix of 55% U.S. stocks, 10% foreign developed-country shares, 5% emerging markets stocks and 30% U.S. bonds gained an annualized 8.7%, and lost roughly 27% in the crash year of 2008, according to Morningstar. Had you broadened that portfolio to include international bonds, REITs, commodities and hedge funds, it would have returned 8.6% and lost about 25% in 2008. Basically a wash.

The results could be different over other periods. But the point is that once you own a diversified blend of low-cost funds or ETFs that include U.S. stocks and bonds and foreign shares, you should think long and hard before taking on more investments.

Unfortunately, many investors can’t seem to resist loading up on every Next Big Thing investment that comes along.

How can you tell whether your portfolio is an example of prudent diversification or imprudent di-worse-ification?

Do you regularly add new investments to your portfolio? If you do, you’re probably di-worse-ifying. Once you’ve created a well-balanced portfolio, your investing work is pretty much finished. Sure, there’s monitoring and rebalancing, and maybe jettisoning the occasional dud and replacing it with a new version of the same investment (a situation you can largely avoid if you stick to index funds). But you don’t need to constantly add new asset classes or investments just because investment firms keep bringing them out. In fact, if you do, you’re more likely to end up with an unwieldy hodgepodge of investments that’s difficult to manage rather than a simpler portfolio that more efficiently balances risk and return.

Using Dividends to Create That New 60/40 Balanced Portfolio


The classic Balanced Portfolio typically includes broad based stock and broad based bond assets.Given the current lower bond yield environment, is it time to re-tool the Balanced Portfolio?Investors might consider using lower volatility stock assets that would allow investors to allocate less to those sleepy bonds.In this example, we'll use Dividend Achievers and Dividend Aristocrats to find that lesser volatility and potential of better risk adjusted returns.

The Perfect Portfolio vs the new 60/40 Portfolio, I looked at the combination of the market beating equal weighted S&P 500 (RSP) with the greater bond inverse relationship (to stocks) potential of longer term treasuries (TLT). We compared the "Perfect Portfolio" to the new 60/40 offered.

Financial analysts have found that lower volatility stock mix by way of the S&P 500 Lower Volatility Index (SPLV) and by lowering the bond component to 20% and moving the new 60/40 to 80/20. Essentially one can historically create the same level of volatility or risk while lessening the bond component. More stock risk management = less use of bonds.

That lesser bond component might not be a bad idea given the current low rate environment and low expected returns from bonds moving forward. And of course many bonds also carry that price risk that will present itself should we actually enter a meaningful rising rate environment. Yes, it would be wonderful if bonds offered us a 6-8% yield and that potential portfolio risk reduction, but that's not the world we live in.

Given the low rates of the day, an investor might get a little 'creative' and look for other ways to potentially manage risk and create a Balanced Portfolio that better meets the goals and risk tolerance level.

Looking at non-correlative assets that do not correlate with movements in equities or bonds have the potential to increase portfolio returns when the optimal portfolio in equities and bonds asset allocation remain true to the Balanced Portfolio whether it's the Perfect Portfolio model or the new 60/40 Portfolio Model

One might also look to adding Litigation Funding or M&A Arbitrage or Commodities or REITs or IPOs to your portfolio while still maintaining the same balance between equities and fixed income assets to a non-correlative mix.

If you desire to delve further into optimal investment decisions you might want to look atHirshleiferon Optimal Investments:Hirshleifer, J.: On The Theory of Optimal Investment Decision, Journal of Political Economy, Vol.66, No.4 (1958), 329-352.

Contact US