Balance Your Investment Portfolio the Diet Way A balanced diet, as defined in literature, is food that provides the body with nutrients needed to function properly. According to nutritionists, every person requires an average of 2,000 Calories (energy value of foods) per day to maintain his or her weight. Nutritional needs however differ depending on age, gender, body size, body shape and activeness. For instance, people who exercise regularly are generally known to require more calories than people who don’t. Food calorie plays dominant role in nutrition. For this reason, a number of people carefully watch their calorie intake especially as they try to lose weight. While watching calorie intake may be necessary, it is equally important to ensure that your calories come from a well-balanced diet. In other words, your body needs calories from different food sources to grow. …and what relationship does a balanced have with personal finance? It has just been stated above that the body needs calories from different food sources to grow. Interestingly, this assertion can be similarly shared with investment portfolio. In finance, investment portfolio is a collection of investments or assets held by an investor. Just like the body calorie analogy, it is always essential to maintain a collection of different asset classes in an investment portfolio. Asset classes include stocks (equities), Treasury bills, bonds, fixed deposits, cash, Real estate, commodities, etc. Maintaining different classes of assets helps reduce investment risks since the potential of their (assets) values falling at the same time is reduced. Choosing the right mix for a balanced portfolio It is further important to determine the right mix of the different assets owned. The practice of determining right mix of different assets is known as asset allocation. In other words, asset allocation refers to how much of each asset class an investor must hold in his portfolio. Not so long ago, I started receiving a number of messages concerning the right mix for an investment portfolio. This was after I had previously published a post on investment diversification. Precisely, most questions centered on the exact percentages that must be assigned to the various asset classes in order to have a balanced his portfolio. While it is always recommended to ensure an appropriate mix, the subject of maintaining precise percentages of the various assets can be debatable. Practically, there is no single way to balance an investment portfolio. This is because everyone has different needs and requirements. Each individual may find himself in a different financial circumstance. Hence, it would be appropriate to balance your investments based on factors such as your investment objectives, your age, as well as risk tolerance. In addition, just like ingredients in a balanced diet, it is similarly not expected to ensure equal proportions of each asset class in a balanced portfolio. In other words, balancing your portfolio does not necessarily mean assigning equal proportions to each asset class. That is to say your portfolio does not necessarily have to consist of 25% of equities, 25% of fixed deposits, 25% of cash and 25% of Real estate. If your financial circumstance demands regular passive income, it would be necessary to allocate adequate portion to liquid forms of investment. For instance, you may need your invested money in the short to medium term if you’re nearing your retirement. In such a situation, investing more of your money in short-term investments such as fixed deposits or Treasury bills can be helpful. On the other hand, a young person far from retirement can choose to allocate greater percentage of his portfolio to equity investment. Of course, an investment portfolio for a 30-year old guy must differ from that of a 55-year old person nearing retirement. It is like making changes in your diet as you grow older.  In effect, the mix of assets that is suitable for you can change at different stages in your life. Final words Just like balanced diet helps maintain a healthy body [shape], a balanced portfolio can be useful to put your finances in good shape. Balancing one’s investment portfolio must be however aimed at suiting his financial needs. As such, factors such as your investment objectives, risk tolerance and age must be considered as you try to balance your various assets. When considering a healthy diet, when you eat is equally important as what you eat. The particular time of the day may impact the choice and composition of balanced diet to stay healthy. For example, the carbohydrate proportion of your breakfast meal may be comparatively high to kick-start the day’s activities. Similarly in personal finance, your stage in life may impact your asset allocation and for that matter your balanced portfolio. As stated before, the portfolio of an adult nearing retirement may constitute a higher proportion of short-term investments in comparison to the portfolio of a younger person. In other words, how much of each asset class you must hold in your portfolio can change at different stages in your life.

Culled from: https://www.sikasem.org