Why is a Balanced Investment Portfolio Important?
A balanced investment portfolio is important because it is a way to have money working for the investor without his taking an extraordinary risk of losing everything should the economy go south in one or another its parts. A portfolio that invests in only one area of finance may make very high returns but it may also fall in value quickly as witness the real estate market over the past few years. An investor who took to heart the old adage of real estate always being a safe investment could very easily have lost his financial shirt if he had not got a diversified investment portfolio to keep him stable.
A balanced portfolio is one that has a carefully planned balance between the possible risk of its investments and the possible gains. It combines equities with fixed income securities so that the risk the portfolio faces is assuaged by the steadiness of its parts. Balancing the higher risk of the one against the sure fire stability of the other in order to achieve a higher rate of return overall is more risky than going with the baseline steady investment but it offers a correspondingly higher return on investment. The trick is in the careful planning.
Balancing a portfolio requires that the manager of the portfolio do his or her homework before putting any money on the table. Knowing what the market is doing and is likely to do in the future is vital to knowing what stocks to buy and which to divest at any given time. The various funds can do very well during some times of stress and not during others and it is the responsibility of the investor to understand what the volatility can do for or against the long term investment.
Price index funds (offered at a large number of stock exchanges) are great in good times for the economy, not so much when things get tough. Investing in emerging markets or in fixed income securities each offers differing advantages to the investor and should be part of a balanced portfolio because the risks and advantages balance each other. The one is quite volatile and can return large profits or great losses, while the other is a steady income stream that can reduce the overall risk to the portfolio as a whole. Likewise with money market accounts and real estate, each a good investment in most times but the steadiness of the one helps offset the risks of the other making them good mates in a balanced portfolio.
Why is a balanced portfolio so important? For the simple reason that a portfolio is for the long haul. A portfolio is intended to keep the investment at the least stable and at the best growing. Keeping the risks under control is the way a balanced portfolio keeps the income from the portfolio going when things are hard: when times are good the portfolio pulls in a little less but in the difficult times come around the same portfolio maintains its profitability.