What Is a Balanced Investment Strategy?

A balanced investment strategy is a way of combining investments in a portfolio that aims to balance risk and return. Typically, balanced portfolios are divided equally between stocks and bonds.

Key Takeaways

  • A balanced investment strategy is one that seeks a balance between capital preservation and growth.
  • It is used by investors with a moderate risk tolerance and generally consists of a 50/50 mixture of stocks and bonds.
  • Balance investment strategies sit at the middle of the risk-reward spectrum. More conservative investors can opt for capital preservation strategies, whereas more aggressive investors can opt for growth strategies.

Understanding a Balanced Investment Strategy

There are many different ways to put together a portfolio, depending on the preferences and risk tolerance of the investor involved.

On one end of the spectrum you have strategies aiming at capital preservation and current income. These generally consist of safe but low-yielding investments, such as certificates of deposit (CDs), high-grade bonds, money-market instruments, and some blue-chip dividend-paying stocks. These strategies are most appropriate for investors who are most concerned with preserving the capital they already have and less concerned with growing that capital.

On the other end of the spectrum, you have strategies aimed at growth. These more aggressive strategies generally involve a much higher weighting of stocks, including those with smaller market capitalizations. If fixed-income instruments are included, they might have lower credit ratings or less security but offer a higher yield, such as in the case of debentures, preferred shares, or higher-yielding corporate bonds. These strategies are best for younger investors with high risk tolerance, who are comfortable accepting greater short-term volatility in exchange for better expected long-term returns.

Investors who are in between these two camps can opt for a balanced investment strategy. This would consist of mixing elements of the more conservative and aggressive approaches. For example, a balanced portfolio might consist of 25% dividend-paying blue-chip stocks, 25% small capitalization stocks, 25% AAA-rated government bonds, and 25% investment-grade corporate bonds. Although the exact parameters can be fine-tuned in many different ways, most balanced investors will be seeking modest returns on their capital along with a high likelihood of capital preservation.

In the past, investors would need to assemble their portfolios manually by purchasing the individual investments involved. Otherwise, they would need to rely on professionals, such as investment advisors, or services offered through their financial institutions. Today, however, online platforms have proliferated, which allows investors to automatically invest money in a selection of strategies organized by risk tolerance. For today's investors, the process of portfolio allocation is more accessible than ever before.

Objective vs. Subjective Risk Tolerance

When determining what strategy to select, it is important for investors to consider not only their objective capacity to bear risk, such as their net worth and income, but also their subjective risk tolerance.

Real World Example of a Balanced Investment Strategy

Emma is a recent university graduate in her mid-20s. She is new to investing and has about $10,000 to invest. Although she intends to make a down payment within the next few years, she has no immediate needs for her investment capital and would be able to postpone withdrawing her capital until a more favorable time in the event of a sudden market decline.

Objectively speaking, Emma’s youth and financial circumstances put her in a good position to adopt a relatively risky investment strategy that has high long-term growth potential. However, given her subjective risk tolerance, she opts for a more conservative approach.

Using an online investment platform, Emma decides on a balanced investment strategy featuring a 50/50 split between fixed-income and equity securities. The fixed-income securities consist mainly of high-grade government bonds, along with some highly-rated corporate bonds. The equities consist of blue-chip stocks, all with a reputation for stable earnings and dividend payments.