The Essentials Of A Well-Balanced Portfolio

When it comes to investing, personal discipline and portfolio balance are key. For investors who strayed from such principles, Covid-19’s impact – which sent the Sensex tumbling over 35%, causing it to be one of theworst-performing global markets – has been an unpleasant reminder. Balancing (and diversifying) a portfolio is critical in reducing market risk and lowering volatility. It is important to understand the essentials of a well-balanced portfolio before you dive deeper into the world of macro-economic events.

A balanced portfolio with careful asset allocation helps reduce market risks. Ideally, it should feature stocks, mutual funds, commodities, and perhaps even long-term bonds. To better understand and apply the concept of a well-balanced portfolio, here are essentials that you should take note of.

Prioritize Managing Risks

The principle idea behind a well-balanced portfolio is risk management. Many financial advisors would recommend you to periodically rebalance your portfolio to protect against volatility and optimize returns. Remember to keep the following in mind:

  • Assess your risk tolerance before you allocate funds. If you are not a risk averse investor, include some mid-caps with blue chips or ETFs. If you are considerably conservative, stick to blue chips almost exclusively, or perhaps invest less in stocks and more in long-term securities such as bonds.
  • Spread your investments across different geographies. Now that investing in US markets has been made easy with Vested Finance, shielding yourself from local risks byinvesting in US stocks could be a way to manage risk.
  • Consider investing in assets that have been pre-screened by professionals. For example, considerVests – which are curated portfolios made for varying risk profiles. They’re dynamically balanced and can save you considerable effort.

Strategic Asset Allocation and Diversification

One way to diversify is to adopt asset allocation. When engaging in strategic asset allocation, we assign a target allocation for each asset within the portfolio. For example, a 70:30 mix of Indian to US stocks may be appropriate and can give investors additional sector and geographic diversification.

Nevertheless, equity markets as a whole are subject to both business and market risks, and more so for individual stocks. Thus, a savvy investor can look to ETFs to enjoy the additional diversification they provide. In addition to market-based risk, an investor is also exposed to time horizon-based risk. Typically, the longer the investment horizon, the higher the risk an investor can take. This is because a longer investment horizon gives you more time to recover from the negative impacts of economic cycles and the inevitable ups and downs of the markets.

Tactical Asset Reallocation

The tactical asset allocation strategy traditionally involves splitting capital between 4 asset classes – stocks, bonds, commodities and cash. But if your preference is the equity market, an equivalent strategy could also be deployed within stocks . Within stocks, you can diversify across companies of different sizes or between domestic and foreign stocks.

Here, your first aim should be asset allocation, followed by securities selection. As multiplestudies (some dating back to 1991) have shown, 90% of a portfolio’s return can be attributed to asset allocation. As per the efficient market hypothesis, the market is able to price in most publicly-available information almost immediately. Thus, it is challenging to predict price movement in the short-term. Therefore, predicting performance at the asset-class level might be more prudent.

As an investor, you should:

– Monitor global markets, and

– Change your asset allocation per macro trends

Tax Efficiency

You can also minimize your tax burden with a well-balanced portfolio. It’s possible to improve gross and post-tax returns without compromising safety and liquidity. For example:

  • There are mutual funds and exchange-traded funds that can be tax-efficient
  • You can improve the tax efficiency of your portfolio by making investments in stocks you plan to hold for one year or more
  • For investors holding shares in foreign companies, such as those investing in US stocks, a holding period of 2 years or more would have their returns qualify as long-term capital gains. The going rate for this is 20% (plus surcharges and fees), but with the benefit of indexation. Read abouthow taxation works when investing in the US here

Conclusion

As an investor, you should select a mix that aligns with your personal and financial goals. A well-balanced portfolio does not have to excessively-diversify away from the “growth” part of the portfolio (by cutting down its notional allocation). Instead, a well-balanced portfolio leverages less-volatile stocks (such as blue chips stocks) or bonds, which traditionally have negative correlation vs. stocks, to complement growth-based selections. There is no cookie-cutter approach in building a well-balanced portfolio, so it’s important to regularly observe the performance of our investments and adopt appropriate strategies accordingly.


This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

Our team members at Vested may own investments in some of the aforementioned companies. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.

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