(This article is for informational purposes only and should not be interpreted as investment advice in any case).
In my previous post, I wrote about the high-risk profile, which I consider to best match my style as an investor. In this article, we will delve into the profile of the balanced investor, which offers a balance between risk and safety in investments. In another article, I will cover the last profile: the conservative investor.
What is a balanced investor?
A balanced investor seeks a middle ground between risk and return. Unlike high-risk investors, who are willing to tolerate significant fluctuations in their portfolio, the balanced investor adopts a more moderate strategy. This profile is willing to tolerate some level of volatility in exchange for higher returns but without fully compromising the safety of their investments.
Main Characteristics:
- Balance between risk and safety: The balanced investor combines high-yield assets with safer ones to maintain a balance.
- Active diversification: They usually invest in a mix of stable company stocks and bonds, along with ETFs that provide exposure to different sectors.
- Tolerance for moderate volatility: They are willing to endure market fluctuations but tend to avoid highly volatile investments like cryptocurrencies.
- Medium to long-term investment horizon: This type of investor typically has an investment horizon ranging from medium to long-term, seeking to take advantage of both growth opportunities and security.
Advantages of being a balanced investor
- Efficient diversification: The balanced profile is characterized by its ability to diversify investments across different asset classes. This helps reduce the risk associated with a single asset class, such as stocks, and mitigates losses during market downturns.
- Better risk-reward ratio: Balanced investors tend to capture decent returns without being exposed to market extremes, offering greater stability compared to high-risk profiles.
- Adaptability: This type of investor is flexible and can adjust their portfolio depending on market conditions, maximizing growth in bull markets and protecting themselves during recessions.
Disadvantages of being a balanced investor
- Limited returns: By prioritizing a balance between security and profitability, balanced investors may miss out on the opportunity for spectacular returns, such as those seen in cryptocurrencies or high-growth stocks.
- Controlled volatility, but still present: While the risk is lower than in a high-risk portfolio, investments in stocks and other higher-yielding assets can still experience fluctuations, which could lead to significant losses during crises.
- Market dependency: By combining different types of assets, a balanced portfolio may be exposed to both losses in the stock market and interest rate movements that affect bonds and other safer assets.
Ideal profile for a balanced investor
This profile is ideal for people who want to grow their wealth without taking excessive risks. It is generally recommended for those with a medium to long-term investment horizon and a level of financial stability that allows them to tolerate some volatility while also seeking to protect their capital. Balanced investors are often interested in investing for retirement or medium-term goals, such as buying a home or paying for their children’s education.
Balanced portfolio distribution
For a balanced investor, the key lies in distributing their portfolio to include a mix of growth and safer assets. Below is a suggested distribution for a balanced portfolio:
- 35%-40% in Stable Company Stocks: Investments in companies with stable growth records and regular dividends. For example, stocks of large companies like Apple, Microsoft, or Johnson & Johnson.
- 30% in Bonds or Fixed Income ETFs: These assets provide stability and a steady income stream through interest, cushioning the volatility of stocks.
- 20% in Diversified ETFs: Sector-specific or broad-market ETFs that capture growth across different sectors without assuming the total risk of a single stock.
- 10%-15% in Alternative Investments (Optional): A small portion of the portfolio can include riskier investments, such as cryptocurrencies or startups, for those who want to take a controlled risk.
This type of portfolio allows investors to capture growth opportunities while protecting part of their capital against volatility. It is ideal for those looking to grow their wealth without the emotional rollercoaster that more aggressive investments can provoke.