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Everything About The Best Portfolio Balance

Triston Martin Updated on Sep 02, 2022

Introduction

It's the same with diet; there isn't a universally perfect eating plan. No one-size-fits-all ratio of protein, fat, and carbohydrates will help you reach your goals; instead, it will depend on your body composition and the type of changes you hope to make (e.g., more endurance, more muscle, less fat). The same holds for your investment portfolio. When we first started working together, one of my primary goals was to help my client "maximize my return while avoiding risk."

This is the equivalent of the Holy Grail in the business world. She may as well have stated, "I want to make good investments," and it would have been just as useful. There will never be a single optimal portfolio balance for all investors because of their vast individual differences. However, some universals and patterns are relevant to individuals' life circumstances and can help bring about harmony in risk tolerance. Every year, countless returns go unrealized because seniors invest like twentysomethings, and parents invest as singles should.

A Balancing Act

The same holds for your investment portfolio. My former client's primary financial goal was to "maximize my return while avoiding risk," as she put it. This is the equivalent of the Holy Grail in the business world. She may as well have stated, "I want to make good investments," and it would have been just as useful. There can never be a universally ideal portfolio balance so long as people have different ages, incomes, net worths, desires to grow wealth, propensities to spend, aversions to risk, numbers of children, hometowns with varying costs of living, and a million other variables. However, some universals and patterns are relevant to individuals' life circumstances and can help bring about harmony in risk tolerance. A lot of people in their senior years invest like they're in their twenties, and a lot of people in their parental years invest like they're single.

Risk Tolerance Decreases

Most investors' risk appetite diminishes in their 30s and 40s. These traders are more hesitant to put a sizable chunk of their capital at risk in a single trade. Instead, they want to continue automating their long-term investments while simultaneously amassing a cash cushion for unexpected expenses and lavish purchases. Many of the market's focused customized products, such as target-date retirement and target-risk funds, may appeal more to seasoned investors. These investors may also bet on value against growth, with the former generating income and the latter rounding out some of their higher-risk investments.

Fortune Doesn't Favor the Reckless

However, luck doesn't shine on the careless, and you'll need to start putting away money for retirement at some point. In the event of retirement, it can be advisable to start with the three classic types of securities - in decreasing order of risk (and of possible return), that's stocks, bonds and cash. (You're invited to audit the advanced course if you consider putting money into obscure financial instruments like credit default swaps and rainbow options.) The usual rule of thumb, unduly basic and old-fashioned, is that your age in years should equal the amount of your portfolio invested in bonds and cash combined.

Nobody on Earth has a birthday tradition where they ask their financial planner to shift 1% of their portfolio from stocks to bonds and cash. Furthermore, since the average lifespan has increased since the adage's inception, the conventional opinion now holds that one should add 15 to their actual age before deciding how much of their investment portfolio should be invested in stocks and bonds.

MidCap Dividend Fund (DON)

It is often claimed the mid-caps are the ignored portion of the equities market. Mid-cap equities are less volatile than their small- and large-cap counterparts, and they have traditionally outperformed their larger-cap competitors. Knowing these characteristics, it is safe to conclude well-balanced portfolios should incorporate more than just large-cap shares.

WisdomTree U.S. MidCap Dividend Fund (NYSEARCA: DON) is a top pick for investors seeking exposure to the mid-cap market. DON's trailing 12-month dividend yield of 2.59% is over 120 basis points above the S&''P MidCap 400 Index yield. Over long holding periods, DON has a track record of outperforming the S&''P MicCap 400 and actively managed mid-cap funds.

Conclusion

Investing isn't a hard science like chemistry, where the same experiment under the same conditions leads to the same outcome every time. Although there is no guarantee in investing, a few hypotheses may be relied upon, and most of them relate to the correlation between age and risk. Start by learning how your risk tolerance and your immediate vs long-term financial needs might inform your portfolio's stock, bond, and cash allocations. From there, you may decide to diversify into other asset classes, such as real estate, or make a few high-risk, high-reward investments in fast-growing public companies. The best portfolio balance is tailored to your individual risk preferences, investing time horizon, and other factors as your circumstances change.