Why your investments need steering
If building a balanced portfolio is what you want, equally important is keeping it balanced ⚖️ months and years down the line. This learning guide will help you do exactly that and show you how much it might save (or earn!) you in the long run.
If you’ve been following along with the other learning guides, you’ll be in a pretty good place. You’ve assembled a pile of cash 💰 and decided what to do with it – likely choosing a strategy that splits it up between savings and investments for example.
But you’re not done yet! You need to figure out exactly how to fork off your finances. And what’s more, there’s a need to tread carefully going forward – you don’t want to lose your balance.
How should I split up my cash, then?
First off, you’ve got to decide how much risk 🎢 you can stomach. Different investments have different risks associated with them – cash in a savings account and most government bonds are very safe, corporate bonds are a little riskier, and stocks are riskier still. Risk varies within those categories too: after all, not all companies are equal.
Higher risk often means higher potential returns, so depending on your personal situation, you might want to weigh things more heavily in one direction (more on making this decision in the next session).
But you probably don’t want to put all your eggs in one stocky basket. 🧺 Though different companies’ stocks move differently, the stock market as a whole tends to move in the same direction – the various stock movements are correlated.
But some assets are uncorrelated (or better yet, negatively correlated). That means they don’t move the same way as other investments. For example, when stocks do poorly, bonds tend to do well (though that’s not a hard rule these days).
If your investments are spread across uncorrelated assets, then any losses in one should hopefully be offset by gains in others. Building a portfolio like this – a so-called diversified or balanced portfolio – can help minimise your risk of losses compared to the potential for returns. 🤘🏼
(Economists proved this mathematically back in the ‘50s – although some of the assumptions they used are still controversial.)
So once I’ve built my portfolio, I’m done?
Not quite. Lots of investors choose a certain split (e.g. 60% stocks, 20% bonds, 5% real estate, 5% gold, 10% cash) and make sure they stick to it over the long run. If your stocks gain and your bonds lose, stocks will become a bigger percentage holding of your portfolio – meaning the riskiness of your overall portfolio nudges upwards.
To deal with this, investors rebalance: in this case, selling some of their stocks and buying more bonds to bring them back to that original, more comfortable, 60/20/5/5/10 allocation. 😅
Selling your winners is counterintuitive; we know: that’s what this learning guide is for. We’ll walk you through the process of keeping your investments in check and how to know if you’re doing alright, as well as weighing up whether rebalancing is right for everyone.
To start: how do you actually build a portfolio?
Keep in mind that when you invest, your capital is at risk, and you may get back less than you invested. This learning guide is for information purposes and is not investment advice.