How to create a balanced share portfolio

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A balanced share portfolio is one that strikes a balance between risk and return. The result is a portfolio that is secure enough to withstand market fluctuations without losing its potential for profitability. This blog will share some tips for balancing your portfolio, including the different asset classes you can use to do so. Keep reading to learn more.

Types of investments that can be included in a balanced portfolio

Before choosing individual assets for a balanced portfolio, it’s important to understand the different asset classes and their respective levels of risk. These are:

Cash

Cash assets such as bank bills, term deposits, and high-interest accounts can offer short-term, stable returns with relatively little risk. This is considered the one of the safest asset classes because positive returns are almost guaranteed unless the bank fails.

Bonds

Bonds give investors regular interest payments in return for an invested sum which is paid off at the end of the term. These are generally issued by governments or large public companies undertaking major projects and they tend to be a low-risk investment with a 1-10 year timeframe.

Equities

Equities are shares that represent partial ownership of a company. These tend to carry a higher risk than other securities (as the company or market might perform poorly), but they often produce larger long-term returns.

Alternative investments

These could be anything from real estate to cryptocurrency. The risks will vary widely depending on the asset and your knowledge of the sector.

How to balance your investment portfolio

In theory, a truly balanced portfolio should contain a 50/50 split between higher and lower risk assets. The most commonly cited model is 50% bonds and 50% equities, for example.

But a 50/50 split isn’t the only option, nor do you need to limit yourself to a certain number of asset classes when balancing your portfolio. You might lean in either direction (a 60/40 split) depending on your individual preferences and financial circumstances, such as:

Your age

If you’re older and depending on your investments for retirement or paying off the last of your mortgage, you may want to play it safe with more low-risk investments.

Alternatively, an investor in their 30s might prefer to weigh their portfolio in favour of higher-risk assets because they have many years left to grow their capital and ride out short-term losses.

Your risk appetite

Some people love the thrill of raising the stakes and riding volatile markets, whereas others will lose sleep over even minor losses. Consider your own capacity for risk when building your portfolio.

Investment experience

You might decide to invest more heavily in a particular asset or asset class if you have deep knowledge of the sector. Alternatively, if you’re a relatively hands-off investor, it may be good idea to keep things as balanced as possible.

Balancing your portfolio with an ETF

Once you decide on the balance of asset classes in your portfolio, you have to choose the assets themselves. This can be overwhelming for newer investors because building a balanced portfolio from scratch involves a lot of guesswork without experience.

Exchange-traded funds (ETFs) tend to be a popular choice for investors looking to balance or diversify their portfolio, as they allow you to invest in a basket of assets that are traded on the open market. Because the assets are pre-selected to represent a balanced mix, you don’t have to pick them yourself.

Different ETFs cater to different asset classes – everything from IPO equity to offshore markets – so investing in several ETFs may give you exposure to diverse sectors.

Read our guide on what to look for when buying ETFs to learn more.

Rebalancing your portfolio

Markets change, as do your financial circumstances, so it’s vital to periodically assess and rebalance your portfolio. For example, this could be done by:

1. Selling some of your bigger holdings and using the cash to purchase more diverse assets.

2. Using new money to purchase extra assets on top of what you already have.

The first approach allows you to rebalance without having to invest extra cash, but the second lets you hold onto high performing assets that have grown to take up a bigger portion of your portfolio.

When to rebalance your portfolio

Annual rebalancing is generally sufficient unless you have extremely volatile holdings, but you can also rebalance as the need arises. For example, you might want to rebalance in response to:

Market changes

Fluctuating asset prices can throw off the balance of your portfolio. For example, a relatively balanced portfolio containing 60% shares and 40% bonds will be tipped heavily towards shares if the share market doubles over a given period while bond prices remain the same.

Personal needs

As you grow older and your financial circumstances change, your risk tolerance likely will too. For some, this means swapping out risky equities for safer investments like bonds or cash. Alternatively, you may choose to invest more aggressively as you build experience.

Average returns on a balanced portfolio

According to statistics from Vanguard, balanced portfolios have historically produced the following annual rates of return on average:

• 8.7% for portfolios with 50% equity and 50% bonds.

• 8.2% for portfolios with 40% equity and 60% bonds.

• 9.1% for portfolios with 60% equity and 40% bonds.

These figures might seem to suggest the more equity the better, but it’s important to remember that this also means significantly more risk exposure.

Calculate your asset allocation with Sharesight

If your goal is to create a balanced portfolio, it's important to have a clear picture of your portfolio's asset allocation – especially if you invest across different asset classes, markets or currencies. One easy way to determine this is by using Sharesight’s diversity report, which provides investors with a breakdown of their portfolio’s asset allocation based on the classifications of their choice. You can run this report as many times as you like, over any chosen date range, making it a convenient way to track your asset allocation throughout the year and rebalance your portfolio as needed.

With the diversity report, investors can determine their portfolio’s asset allocation by market, currency, sector, industry, investment type, country, or custom attributes of their choice.

Track your investment performance with Sharesight

Thousands of investors worldwide are already using Sharesight to automatically track the performance of their investment portfolio. What are you waiting for? Sign up and:

• Track all your investments in one place, including stocks in over 40 major global markets, mutual/managed funds, property, and even cryptocurrency

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• Run powerful reports built for investors, including Performance, Portfolio Diversity, Contribution Analysis, Multi-Period, Multi-Currency Valuation and Future Income (upcoming dividends)

• Get the true picture of your investment performance, including the impact of brokerage fees, dividends, and capital gains with Sharesight’s annualised performance calculation methodology

Sign up for a FREE Sharesight account and start tracking your performance (and tax) today.

FURTHER READING

• 3 reasons why you need to be tracking dividends

• How mergers and acquisitions affect your investment performance

• 7 reasons why Sharesight is better than a spreadsheet