Finding the Balance Between Investment Risks and Rewards

How to Achieve a Perfect Blend of Risk and Security While Making Investments

Portfolio management can be a complex task especially when you are trying to save for your retirement. The challenge here is to achieve a perfect blend of risk and safety so that you have a handsome portfolio by the time you retire. It is also worth mentioning that playing it too safe can oftentimes prove to be counterproductive. Let us delve into the details which illustrate this fact.

How to achieve a perfect blend of risk and security while making investments

Option 1: Investment in CDs and Money Market Accounts 

portfolio managementInvestment in CDs and money market accounts can certainly help to protect you from market downturns. But, over the long term, this strategy can actually prove to be counterproductive.

The main reason is that CDs along with bank money market accounts will not provide required returns (when you consider taxes and inflation) that will be necessary to help you sustain purchasing power during your retirement. 

Option 2: Investment in ETFs or Index Funds

As such, it will be necessary to make use of bond funds as well as stocks to ensure you will have enough money to sustain yourself during a long retirement. Moreover, as part of portfolio management, your focus should be on investing in low fee ETFs or index funds so that it becomes possible to maximize the returns you are able to earn.

Achieving a Perfect Blend

Investment in stocks and bonds does not mean that you will have to abandon CDs and money market accounts. A certain amount of investment in these options will still be helpful and ensure you have funds to meet emergencies. Moreover, these investments will also help in providing you with a couple of years worth of living expenditures. 

When it comes to investing in stocks and bonds, you will have to do so in a manner that it balances your risks as well as returns. Moreover, there should be enough investment in stocks so that your portfolio generates required returns. But, you will have to ensure that too much investment in stocks is not made since then you will not get desired returns when the market starts behaving erratically.

Thus, the goal should be to develop that perfect mix of bonds and stocks which will be able to provide you desired returns in both good as well as bad market conditions.

What percentage of your portfolio should be made up of stocks and bonds?

As part of portfolio management, ideally, the stock holdings should be around forty to sixty percent of your portfolio and will be enough to help you achieve desired returns.

However, it will be a lot better for you to consult a financial advisor to know the ratio that will be right for you. To take such a decision your financial advisor will examine your risk tolerance level so that a right mix of investments can be used.

A Final Note

To summarize we will say that it is possible to achieve desired returns with proper planning and portfolio management.

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