Balancing your portfolio deals with three important aspects to consider for your investments:
- Risk—Seek to balance risk and return. Your willingness to take risks may be greater when you’re younger and have more years to correct from choices that may turn out to be money losers. As you get older, you are likely to reduce the amount of risk you are willing to tolerate, given you don’t want to jeopardize your principal amount of savings needed for retirement.
- Returns—Interest rates can be low in one period, higher in another. Stocks can appear cheap today, and then tomorrow the market turns frothy and speculative. Bonds, long-term, rose for decades as interest rates were suppressed and decreasing, then fell hard when inflation forced interest rates back up. What was once considered conservative for decades became risky in the past several years.
- Diversification—This is a strategy of buying different types of investments to reduce overall risk and volatility. There are many new and various investment vehicles and options being offered to investors.
Over a period, these allocations don’t stay the same. If the stock market doubles over five years, but bond interest rates and principal amounts didn’t change much, your initial portfolio of 70/30 has mathematically changed to 82.3/17.6. Time to lighten up on stocks and move more into bonds—that is, assuming your overall strategy hasn’t changed. As we age, we would generally find our bond allocation should grow, not decrease. One way to view bonds is the interest is the (in part) cash flow replacement for the paychecks we received before we retired.
