How to Balance an Investment Portfolio
There really is no one correct way to balance an investment allocation. An ideal balance between growth opportunity and risk of loss will vary with each person. Some people will have a high tolerance for risk while others will not want to take hardly any risk at all. Financial circumstances and objectives will also determine what is the best balance for your portfolio of investments.
There are numerous things you should take into consideration when attempting to formulate the best mix of assets for your portfolio. Your financial circumstances will play a key role in determining how much you are actually able to invest and how much risk you can afford to take. It is important to look at your living expenses and your current income. Your projected future income can also be taken into account.
Also, tolerance for risk will vary from person to person. Each individual will have their own comfort levels for risk. Take time to carefully consider your own risk tolerance level.
Risk vs. reward
In investing, the dynamic between risk and reward is something that you will always be calculating. The reality is that it is not possible to have any opportunity for gain without taking at least a certain amount of risk in the market. If you want to have the potential to make gains quickly you will need to be ready to take significant risk of loss. This could mean looking into assets such as technology stocks or commodities. On the other hand, less volatile investment options such as government bonds will not have as much potential for large and immediate gains.
Changing risk tolerance
You should be aware that tolerance for risk can be significantly dependent on a person’s age. This means as you become older your risk tolerance will likely change. When you are young you are usually still physically healthy and will likely have many years left to work and earn money. Therefore, you may be more comfortable entering riskier investments since you know you can continue working to earn income in the case of you taking a loss.
However, those who are older will usually become more conservative and want to take less risk. The older your age the closer you will be to retirement age. This means you will be closer to no longer taking any income. Therefore, a large investment loss can be more devastating to older individuals who need to prepare for their golden years.
Do not invest recklessly
Although risk is necessary for gain you should always take calculated risks when making investment portfolio decisions. This means comprehensive research on any potential investments you are looking to make. Take into consideration the macroeconomic factors as well as the financial circumstances of the specific investment opportunity.
Also, you should have an idea as to how long you are willing to hold an investment asset. This will depend on your projections for future market trends. Additionally, when looking into highly speculative assets such as commodities or cryptocurrency be sure to only invest funds that you can afford to lose.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Paramount Wealth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results.
Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.
Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices.