It’s a phrase so many investment professionals use, but for a pension or non-pension investor, what does it mean? How do I achieve it and is it applicable to me?

The answer is most definitely ‘yes’. Regardless of the purpose of accumulating Capital, achieving balance of holdings is crucial to achieving the investment returns you strive for. A balanced portfolio invests in a range of assets that match your risk tolerance and time horizon.

But how do we determine the right mix?

Most of us know why we shouldn’t keep our eggs in one basket. When trying to build a portfolio, much will depend on your stage in life. If you are new to investing, the balance of your portfolio may be quite different to that of a more senior individual or company thinking of wealth usage.

Step 1. Seek Independent Advice and understand your risk tolerance
One of your first considerations is to seek advice from those who have travelled this road before you. The Advisor Market is the first step in getting informed as to what is available from a variety of options, as opposed to a particular institution’s suite.

Understanding why you are investing is an important step. What do you want to achieve, and in how many years do you wish to use the accumulated capital? Patience will be rewarded over the long term, and we advocate allowing sufficient time to set realistic and meaningful investment goals. The most effective goals are genuinely aligned with your ambitions and preferences. For a retired investor, that could mean sufficient income, legacy benefits, or world travel. For someone younger, it could mean home ownership or children’s education. Whatever the requirements, your tailored portfolio should meet your needs today without compromising what you wish for tomorrow.

Knowing your risk tolerance is a fundamental building block of long-term investment success. In tandem with your advisor, setting goals and understanding the difference between desiring and delivering will go a long way towards determining the level of risk that you are willing and able to take. In turn, your risk tolerance will affect the type of assets you own and, ultimately, the shape of your portfolio.

Step 2. Diversify your assets
In contrast, a younger investor may have a longer-term outlook, demand higher returns and be more tolerant of investment volatility. By accepting more risk, this investor is potentially willing to take more substantial short-term losses in return for higher long-term growth. Once we understand our risk appetite, it’s time to protect our assets for the longer term. The key task is diversification. Diversification is a risk management strategy that creates a mix of various investments within a portfolio.

Once we have a better sense of our values and interests, we’ll be more likely to find assets that suit our personality and meet our financial criteria. That’s the theory. Real-world investing is not always black and white. Most portfolios are likely to contain a balance of stable, low-risk investments and a smaller proportion of higher-growth assets that carry more risk. This is something called a core-satellite strategy. In this scenario, many investors delegate the day-to-day management of the core portfolio to experienced investment professionals using investment funds. This approach offers peace of mind about our portfolio yet still allows you to explore your investment ideas. Now that you’ve established your goals and risk appetite, and recognise the benefits of diversification, it’s time to design your portfolio.

A balanced portfolio consists of different percentages of bonds, commodities, equities, and other so-called asset classes. At Insight Private Clients, there are several strategies to consider: fixed income, income, balanced, growth and yield. Each approach is designed to offer a different profile of risk and return. If your risk tolerance is low, you might want to add more bonds to your portfolio and choose the ‘fixed income’ strategy. On the contrary, if your risk profile is very high, you might want to add a higher percentage of equities to the mix (‘growth’ or ‘yield’).

Textbooks have been written about asset allocation, which is an area where many investors seek advice from experienced professionals. In the meantime, here are three tips for budding asset allocators:

  1. Don’t rely on past performance as a guide to future returns. Historical correlations are often unstable and unreliable. It can be tempting to look back at how asset classes have behaved over time, but it’s like driving while staring in the rear-view mirror.
  2. Diversify across and within different asset types. This can help you manage risks and maximise returns. For example, if you invest in stocks, consider diversifying across different sectors and company sizes. If you invest in bonds, think about spreading your exposure across various maturities and qualities.
  3. Get involved! Checking stock prices too often is counterproductive, but having an emotional connection with your investments helps you to stay engaged. Once you have a better sense of your values and interests, you’ll be more likely to find assets that suit your personality and meet your financial criteria.

Step 3. Rebalance regularly
Over time, the balance of your portfolio will shift and certain assets may outperform others. When this happens, you should rebalance them so that your investments continue to support your long-term goals without running unintended risks. For example, if your portfolio has a 60% allocation to stocks and 40% to bonds, you may become over-allocated to stocks if they outperform. Generally, stocks are considered riskier than bonds, so your portfolio may need to be rebalanced by selling stocks.

Portfolios are more likely to become unbalanced when markets are unpredictable. This is when the time spent setting your investment goals will pay.

Remember your goals, stick with your strategy, invest for the long term and make informed decisions.