What Is a Balanced Investment Strategy?

A balanced investment strategy is a way of combining asset classes in a portfolio that aims to balance risk and return. Typically, balanced portfolios are divided between stocks and bonds, either equally or tilted to 60% stocks and 40% bonds. Balanced portfolios may also maintain a small cash or money market component for liquidity purposes.

Key Takeaways

  • A balanced investment strategy is one that seeks a balance between capital preservation and growth.
  • It is used by investors with moderate risk tolerance and generally consists of a 50/50 to 40/60 mixture of stocks and bonds.
  • Balanced 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.

On one end of the spectrum are strategies aimed at capital preservation and current income. These generally consist of safe but low-yielding investments, such as certificates of deposit, investment-grade bonds, money market instruments, and some blue chip stocks that pay dividends. These strategies are appropriate for investors concerned with preserving the capital they already have and less concerned with growing that capital.

On the other end of the spectrum are strategies aimed at growth. These more aggressive strategies generally involve a higher weighting of stocks, including small-cap companies. 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 suitable 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 fall between these two camps can opt for a balanced investment strategy. This would consist of mixing 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, 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 individual investments. Otherwise, they would need to rely on professionals such as investment advisors, or services offered through their financial institutions. Today, automated investing platforms allow investors to automatically invest in a selection of strategies organized by risk tolerance. The process of portfolio allocation is more accessible than ever.

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.

Balanced Funds

A balanced fund is a mutual fund that contains both a stock and bond component, as well as a small money market component in a single portfolio. Generally, these funds stick to a relatively fixed mix of stocks and bonds, such as 60/40 stocks to bonds. Balanced mutual funds have holdings that are balanced between equity and debt, with their objective somewhere between growth and income. This leads to the name "balanced fund."

Balanced mutual funds are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation. Typically, retirees or investors with low-risk tolerance utilize balanced funds for healthy growth and supplemental income. The equities component helps to prevent erosion of purchasing power and ensure the long-term preservation of retirement nest eggs.

Real World Example of a Balanced Investment Strategy

Taylor is a recent university graduate in their mid-20s. They are new to investing and have about $10,000 to invest. Although they intend to make a down payment within the next few years, they have no immediate needs for their investment capital and would be able to postpone withdrawing their capital until a more favorable time in the event of a sudden market decline.

Objectively speaking, Taylor's youth and financial circumstances put them in a good position to adopt a relatively risky investment strategy that has high long-term growth potential. However, given their subjective risk tolerance, they opt for a more conservative approach.

Using an online investment platform, Taylor 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.