Stocks Bonds and Mutual Funds how to Balance your Portfolio

The best way to balance your portfolio between stocks bonds and mutual funds, is to first assess your level of risk tolerance. You’ll need to ask some important questions and be honest with yourself. Here are a few examples:

1. How old are you? Typically, older investors will have a larger percentage of their funds in bonds or low risk mutual funds and less in common stock. Some preferred stock is not unusual since this form of security behaves more like a bond then a stock when it pays its dividends. The reason for this is that you have less potential earning time than a younger person, and therefore, less time to make up any possible losses.

2. If your portfolio lost 5%, 10%, or 15% in a month, a quarter, a year, how much would you worry? If these types of drops over a short time horizon bother you an awful lot, then safer investments are for you. If you have a longer time horizon and are comfortable with the ups and downs of a fluid market, then riskier investments may be your cup of tea.

3. How much discretionary income do you have? If you are investing in the markets and not making enough for a comfortable living situation, not only should you consider safe investments, but question whether or not you should be in the market at all. Any emergencies that will cause you to need the money you invested will result in sales charges when you need to sell them, and you may not be in the positive by that point.

These are only some examples of questions you could use to determine the fit of certain investment vehicles. Next, you’ll need to educate yourself on what is risky inside each of the investment choices you’ll be thinking about, and what the minimums are to invest in them.

You may be thinking that corporate bonds are safer than stocks, and for the most part you are correct, but the company you are buying bonds from is a foreign entity. Now you have to worry about their currency devaluing against the dollar, and any political upheaval or legislation their home country may pass. Then there are the taxes. Of course foreign markets can act independently (to a point) of our markets, so a bear here, might be a bull there.

Any way you go, the biggest consideration for you should be to properly allocate your assets. Choose a percentage at the beginning of your investing career that you will put in each type of investment. At least once a year, rebalance your portfolio, sell your gains and balance back out to the original percentage equation.

Statistically, those who have allocated their assets have gained more than those who have simply diversified their portfolios and left them to their own devices. Make sure that you are also reviewing your risk tolerance on a regular basis and adjusting the mix of investments accordingly. As usual, you should always consult with a professional when you have any questions.