What does it mean to have a well-rounded portfolio? What is the ideal asset allocation for a balanced portfolio? U.S. Money Reserve takes a look at what financial experts recommend when building a well-diversified portfolio of traditional assets, as well as your options for a variety of alternative assets.
Why Is a Balanced Portfolio Important?
A balanced portfolio, combining a variety of assets, helps minimize risk and maximize returns. A well-balanced portfolio relies on asset diversification. For instance, you might aim to pick a mix of stocks, bonds, precious metals, cash, and other assets. And within each category, you’d want to further diversify, such as buying U.S. and international stocks to balance potential economic fluctuations across different countries.
Over time, you’ll likely want to rebalance your portfolio based on circumstances such as job loss, a new job, a new child, divorce, or loss of a loved one. Rebalancing involves shifting your asset allocations in response to life changes as well as market fluctuations.
Ultimately, portfolio diversification can help future-proof your assets, enabling you to help safeguard them from adverse events and take advantage of positive events.
What Does a Balanced Portfolio Look Like?
There’s no one model for a balanced portfolio. Instead, a balanced portfolio should reflect your goals and when you want to achieve them. There are short-term and long-term strategies for saving for retirement. Do you want to retire in 10 years? Is retirement 25 years away? Also, what is your tolerance for risk? Answers to these questions and others can help dictate the makeup of a balanced portfolio. Take U.S. Money Reserve’s free Retirement Quiz to learn more about your retirement situation.
While it’s by no means a definitive prescription for a balanced portfolio, the following gives you an idea of what the structure of your balanced portfolio might look like. It’s also recommended to consult your financial advisor before deciding what the best mix for your portfolio should be.
The share of stocks that are held in your portfolio typically varies by age. One commonly referred to rule of thumb states that someone should hold a percentage of stocks equal to 100 minus their age. So if you’re 50 years old and do that math, you come up with 50%. This is just one approach of many, however, and your individual allocation will vary.
You might own these stocks as part of an employer-sponsored 401(k), an IRA, or a similar financial vehicle. You might also hold stocks in an individual account at a brokerage firm.
Stock market guru Jim Cramer suggests that bonds should make up at least 20% of your portfolio as you get into your 40s. Cramer raises the minimum to between 30 and 50% if you’re in your 50s or 60s. However, any percentage you choose should be based on your objectives and not necessarily on your age.
The U.S. Securities and Exchange Commission (SEC) notes that people buy bonds for several reasons. For instance, they may be seeking a predictable income stream, trying to offset volatility in the stock market, or aiming to preserve capital.
The Corporate Finance Institute recommends keeping 10% of your portfolio in cash, such as a money market account or a certificate of deposit (CD). Stock market gurus like Warren Buffett are known to build up cash reserves in case, for instance, the economy weakens, thus opening up opportunities to buy real estate, stocks, and other assets at low prices.
Gold and Other Precious Metals
Experts have recommended holding 10 to 20% of a portfolio in physical precious metals.
Silver, platinum, and palladium are other precious metals that you might consider adding to your portfolio. Along with gold, these precious metals can be included in a self-directed IRA that holds precious metals.
Alternative assets can be tangible or financial assets. Aside from precious metals, you might look at earmarking 10% of your portfolio for alternative assets such as real estate, livestock, natural gas, industrial metals, insurance policies, or cryptocurrencies.
Alternative asset allocation “won’t move the needle at 1% or 2%,” David Lebovitz, a global market strategist for J.P. Morgan Asset Management Global Market Insights Strategy Team, told CNBC. “You want it to have a direct impact on the overall pool of assets.”
According to FINRA, a nonprofit organization that oversees stock broker-dealers, purchasing an alternative asset like real estate can moderate portfolio risks.
A self-directed IRA can hold precious metals and so much more. Learn how it can work alongside your current financial and retirement strategies. Request your free Gold IRA Kit today or call for a free, one-on-one consultation with a knowledgeable IRA Account Executive.