How to Build a Balanced Investment Portfolio

Summary

• A diversified portfolio spreads money across different investments so one market change is less likely to affect everything you own at once.
• Your goals, time horizon and comfort with potential losses can help shape how much investment risk you take.
• Asset allocation is the mix of investment categories in your portfolio, such as equities, fixed-income investments and cash or cash alternatives.
• Stocks, bonds, funds and certificates of deposit each work differently and can play different roles in a portfolio.

Investing is less about finding one perfect investment and more about building a mix that supports your goals. A thoughtful portfolio can help you balance the opportunity for growth with the amount of risk you are comfortable taking.

Start With Your Goals

An investment portfolio is the collection of investments you own. A diversified portfolio includes different types of investments rather than concentrating everything in one area.

Diversification can help limit the impact of a downturn in one investment or market segment. If all your money were invested in one area and that area declined significantly, your entire portfolio could be affected. With a broader mix, losses in one part of the portfolio may have less impact on the whole.

There is no single portfolio that works for everyone. Your approach should reflect what you are investing for, when you expect to need the money and how much risk you are willing to accept. Someone investing for retirement decades from now may make different choices than someone with a shorter-term goal.

Before choosing investments, define what you want your money to accomplish. Those goals can provide a foundation for deciding how to allocate your funds.

Understand Risk & Reward

Investment risk and potential return generally move together. Investments with greater potential returns can also bring a greater possibility of loss, while lower-risk investments generally offer less potential for growth.

Know Your Risk Tolerance

Risk tolerance is the amount of potential loss you are willing to accept while pursuing an investment goal. It is often described as aggressive, moderate or conservative.

An aggressive investor is willing to accept greater fluctuations and the possibility of larger losses in pursuit of greater potential returns. A moderate investor seeks a balance between growth and risk. A conservative investor generally places greater emphasis on protecting principal and limiting risk.

Your time horizon can also influence how much risk you are comfortable taking. Someone with many years before needing the money may have more time to recover from market losses. Someone approaching a financial goal may have less time to recover and may prefer a more conservative mix.

Your personal comfort matters, too. An investment strategy should account for how you respond to uncertainty and potential losses, not simply your age or financial circumstances.

Decide How Much Help You Want

Investors vary in how involved they want to be in researching, choosing and monitoring investments. Brokerage services can provide access to stocks and other investments, with different levels of support.

Full-service brokerage: A financial professional buys and sells investments for the investor and may provide portfolio advice. These services generally charge commissions or other fees.

Robo-advisor: An automated service uses algorithms to manage a portfolio based on information and goals provided by the investor. Fees may apply.

Online self-directed brokerage: The investor researches and selects investments, while the brokerage platform executes the transactions. Platform, transaction or other service fees may apply.

Professional management does not eliminate investment risk. Returns are never guaranteed.

Build Your Asset Allocation

Asset allocation is the way you divide your portfolio among investment categories. Three broad categories are equities, fixed-income investments and cash or cash alternatives.

Equities represent ownership in a company or other enterprise, so their value is connected to how that investment performs. Fixed-income investments generally involve lending money to an issuer in exchange for repayment plus interest. Cash and cash alternatives generally emphasize stability and liquidity and tend to offer lower potential returns.

A diversified portfolio may use several types of investments across these categories.

Stocks or Shares

Stocks represent partial ownership in a company. When you own stock, you are a shareholder. The value of your shares can rise or fall based on market demand and the company's performance. Some companies also pay dividends to shareholders.

Stocks are generally considered equity investments and can carry significant market risk.

Bonds

A bond is essentially a loan from an investor to a company, government or other entity. In return, the issuer agrees to repay the principal and typically pay interest.

Bonds are fixed-income investments, but their level of risk varies. An issuer can default, and a bond's market value may change before maturity. Researching the issuer and understanding the terms are important before investing.

Funds

Funds combine money from multiple investors to purchase a collection of investments. Common examples include mutual funds, exchange-traded funds and index funds.

Because a fund can hold many investments, it can provide diversification within a single investment. Investors may earn money through distributions from the fund's holdings, gains when investments in the fund are sold or an increase in the value of their shares. Returns are not guaranteed.

Certificates of Deposit

A certificate of deposit, or CD, is a deposit account in which you agree to leave money with a financial institution for a set period in exchange for a stated interest rate.

CDs are generally considered cash or cash alternatives. Deposits at an FDIC-insured bank are insured up to applicable limits. Withdrawing money before the CD matures may result in loss of interest or other penalties, depending on the account terms.

Keep Your Portfolio Connected to Your Goals

Building a portfolio is a personal process. Start with your goals, consider when you will need the money and decide how much risk you are prepared to accept. From there, a diversified mix of investments can help you create a portfolio that reflects your priorities rather than someone else's.

As your goals or timeline change, your investment approach may need to change with them.