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What does a balanced portfolio really mean? How do I make those investment choices?

Industry terms and descriptions such as diversification, asset allocation, a mix of cash, stocks and bonds, and not putting all your eggs in one basket, all refer to balanced investment strategies. But the terminology doesn't explain how you start the investment process rolling. With an ever-expanding choice of financial securities available, where do you begin?

Because investment choices are a matter of individual preferences, situations and objectives, a balanced account for one investor may mean something different to another. That said, there are similar portfolio models, or yardsticks, that financial planners and investment executives use to guide their clients towards a balanced portfolio. An investor's age, time horizon and risk tolerance are key factors in determining which portfolio model is most suited to their needs and objectives.

The portfolio models show a suggested percentage of holdings among cash, stocks and bonds. A pie chart is often used to illustrate the percentage that is recommended to clients in the three categories.

Cash

  • Cash
  • Money-market Mutual Funds
  • Guaranteed Investment Certificates (GICs)
  • Short-term Bonds
  • Savings Deposits

Fixed Income

  • Mid-term and Long-term Bonds
  • Bond Mutual Funds
  • Long-term GICs
  • Preferred Shares

Equities

  • Common Stock
  • Equity Mutual Funds

Spreading your investment dollars among these three securities groups is described as balancing your portfolio. A portfolio including a range of securities in the three investment areas of cash, stocks and bonds minimizes risk.

Generally, a young investor with a longer investment time frame should have a larger percentage of his investment pie in equities. Equities have historically outperformed other investment securities over the long term.

An older investor reaching retirement or beyond would probably reduce his equity holdings and have a greater percentage of his investments in lower risk investments such as bonds, which have less volatility, and offer a greater certainty of return on investment.

Again, personal preference is essential. Conservative investors who can't sleep at night when the equity market inevitably swings would limit their holdings in equities.

Portfolio Examples

Low-risk Portfolio (Minimum Volatility)

Short-term debt instruments 55%

Long-term debt instruments 15%

Equities 30%

Medium-risk Portfolio (Moderate Volatility)

Short-term securities 37%

Long-term securities 18%

Equities 45%

High-risk Portfolio (High Volatility)

Short-term securities 15%

Long-term securities 20%

Equities 65%

It is important to note that these portfolio examples are guidelines only. Most crucial is your comfort level with the securities described.

There is a wealth of information available to help you choose among the three investment areas. Your financial planner, advisor or financial institution can supply you with sample model portfolios and questionnaires to help determine your risk tolerance among the investment choices.

Many investors find mutual funds a good place to start when building a balanced portfolio. Mutual funds are professionally managed and there are numerous mutual fund products available that automatically spread your investment dollars among the three security areas according to your risk tolerance and financial goals.