Many people tend to shy away from investing because they do not want to deal with the unpredictable nature of the markets. However, it is possible to mitigate that volatility and achieve more consistent returns by using a balanced portfolio. In this article, we will explain what a balanced portfolio is and what it aims to achieve.

What is a balanced portfolio? 

A balanced portfolio is a portfolio of investment assets that includes both stocks and bonds. The main feature of a balanced portfolio is that the assets are less correlated to each other. When one part of the portfolio is down, then the other part(s) of the portfolio is generally higher. Periodically, the portfolio will be rebalanced. That means that the outperforming assets will be partially sold with the proceeds used to buy assets from the underperforming parts of the portfolio. This makes the balanced portfolio less likely to have significant drawdowns. A balanced portfolio creates more consistent returns that give many investors peace of mind.

What does a balanced portfolio look like?

A balanced portfolio will tend to have at least two assets that are uncorrelated from each other. Here are three examples of a balanced portfolio that many investors use:

The 60/40 stock-bond Portfolio

With the 60/40 Stock-Bond Portfolio, 60% of the portfolio holds stocks while 40% of the portfolio owns bonds. Usually, the stock portion of the portfolio will be an index fund representing the S&P 500, while the bond portion of the portfolio will contain a mix of long, intermediate, and short-term corporate and government bonds.

The Rick Ferri Three-Fund Portfolio 

The famous personal finance author Rick Ferri recommends building a portfolio of three low-cost index funds which are highly uncorrelated with each other: 

  • 40% Total Stock Market
  • 20% Total International Stock Market
  • 40% Total U.S. Bond Market 

The Permanent Portfolio 

Famed investment expert Harry Browne popularized the Permanent Portfolio strategy in the 1980s. With the Permanent Portfolio, the four assets are held in equal amounts: 

  • 25% Stocks
  • 25% Bonds
  • 25% Gold
  • 25% Cash or T-bills 

What are the benefits of a balanced portfolio?

The main benefit of a balanced portfolio is that you do not have to worry as much about stock market crashes. As an example, we can consider one of the more volatile years in stock market history: in 2008 if your money were invested in the S&P 500, you would have experienced a 50% drawdown in your portfolio. Most investors could not stomach such a steep drop and sold to cash, effectively “fleeing to safety.” In comparison, the three balanced portfolio approaches outlined above experienced the following drawdowns in 2008: [5]

  • S&P 500 -50.89%
  • 60/40 Stock-Bond Portfolio -30.72%
  • Rick Ferri Three-Fund Portfolio -32.64%
  • Permanent Portfolio -13.52% 

Riding out the markets with a balanced portfolio 

If you are looking to enjoy more consistent returns in any market condition, then consider a balanced portfolio. A balanced portfolio gives you a degree of diversification that can protect you and provide steady growth for your portfolio. If you would like to learn more about the many benefits of balanced portfolios, contact us today at Alpha Wealth Funds or examine our separately managed account allocations at (Click Here) 

If you’re pondering this situation, whether to invest all at once or use dollar-cost averaging, please feel free to reach out to me at Chase Thomas by email at cthomas@alphawealthfunds.com and I’ll be happy to discuss it and possibly show you even better strategies to accomplish your goals. A truly balanced portfolio consists of much more than your stock and bonds. As part of my duties as a Certified Financial Planners, I ask people to look at their whole investment life which includes real estate, tax, and estate planning, obstacles, and goals that when viewed as a whole better reflect your investment horizon.