Maintaining the Health of Your Balanced Portfolio

Keeping a balanced portfolio is an essential part of investing in the stock market. If you become too heavily weighted towards a certain class of stocks, you could find yourself in a lot of trouble if that class goes through a downturn. Here are a few things to consider about maintaining the health of your balanced portfolio.

Balanced Portfolio

When you are creating your portfolio, you want to try to keep it as balanced as possible. In addition to investing in different asset classes, you also want to invest in different types of assets from the same class. You will want to invest in several different kinds of stocks. For example, you may want to invest a certain percentage of your money into industrial stocks and a certain percentage of your money into technologies. Investing in the healthcare sector and the infrastructure sector could potentially be a worthy investment as well. 

Overweight Sectors

Many investors make the mistake of putting too much of their money into a particular type of stock. When this happens, their portfolio becomes overweight in one sector. For example, let's say that you decided to put 80 percent of your portfolio into the oil industry. You are doing great for a few years and then someone invents a viable alternative energy source that is much cheaper than oil. When this happens, the value of the oil industry is going to plummet. Your stocks could become worthless in a short period of time. If you had kept a balanced portfolio instead, you could have weathered that financial storm and made it out without too many problems. For example, if you had put 10 to 15 percent of your money into oil stocks and spread the rest of your money around into other sectors, this would not have hurt you so much that it devastated you. It would still hurt to lose 10 to 15 percent of your account, but it would not be nearly as bad as losing 80 percent of your account. 

Rebalancing

Periodically, you will need to make sure that your portfolio is still holding true to the same allocations by rebalancing it. Over time, the values of your stocks are going to change. Some of the stocks are going to go up in value while others will decrease. When this happens, the percentages of your holdings are going to be altered. As the value of certain stocks increase, they are going to take up a bigger percentage of your total account balance. When this happens, you need to continually rebalance the portfolio to make sure that the ratios remain the same.

In order to do this, you will simply need to sell some of the stocks that have appreciated in value and then buy additional stocks from the sectors that have remained the same or declined. In this manner, you can keep the same ratio of investments and keep a balanced portfolio. 

blog comments powered by Disqus
Scottrade