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Finding the Right Asset Balance for Your Investing Goals

You can customize your portfolio of assets to reflect your unique goals, preferences, and risk tolerance at any given stage in your life.

Gemini-Finding the Right Asset Balance for Your Goals -100

Summary

All investments come with different risks and rewards. One way of trying to mitigate the investment risks inherent in any industry or sector is to have a diversified portfolio. Professional portfolio managers diversify, and so should you. Regardless of your specific situation and goals, a well-balanced portfolio could include a variety of assets ranging from stocks and bonds to commodities — and maybe even a crypto portfolio. So how do you find a mix of assets and financial instruments that’s right for you?

Why Asset Balance Is Critical

The global asset market — from stocks to crypto to gold to bonds — offers an incredible variety of assets to choose from when it comes to investing. Every single asset represents both an investment in the asset itself and an expectation of the market forces that will define its future. Both quantitatively and qualitatively, each asset represents a complex web of possibilities that correspond to its price in the market. Thus, it is optimal to diversify the risk you hold across asset classes and markets. The key to achieving this is asset balance in your portfolio of financial instruments.

A Balanced Portfolio Begins With Asset Allocation

A well-balanced portfolio is one key to successful long-term investing regardless of whether you have lots of capital in financial markets, or if the extent of your investments is simply your retirement plan. In all cases, building a diversified portfolio is the act of deciding what type and quantity of assets — stocks, bonds, exchange-traded funds (ETFs), crypto, or other assets — you want to hold. And this, in turn, is informed by your goals, resources, and tolerance for risk. Once you understand these factors, you’re ready to choose a blend of assets that reflects your preferences, degree of comfort with risk, and lifestyle.

For example, say you’re just out of college and you’ve landed a job with a firm that offers a 401(k) plan. You might want to take advantage of this investment vehicle to help save for your future, but you’re nervous because you’ve never invested before. In addition, while you might not know much about investing, you do know that you’ve never been one to take many chances. Based on these factors, you might opt for a more conservative portfolio mix that includes more bonds and Treasury bills, which are traditionally considered safer or less volatile than assets such as stocks or other alternatives. But, regardless of your financial goals or tolerance for risk, it often isn’t enough just to allocate your money to investments and leave them untouched (although for some, that may very well suffice).

Rebalancing Your Diversified Portfolio Is a Continuous Process

Maintaining a balanced portfolio is an ongoing effort rather than a one-time action. Over time, a once-balanced portfolio can skew toward particular assets due to various market forces, which may unbalance your portfolio. Similarly, you may wish to update your holdings over time to reflect the evolution of your financial needs, preferences, and tolerance for risk. Rebalancing refers to the readjustment of your investment portfolio holdings by buying and selling certain assets to attain a desirable balance once again.

Most financial services professionals recommend rebalancing your portfolio on a bi-annual basis. Done too often, you may over-accommodate short-term market fluctuations that don’t really reflect your long-term earnings potential, and in turn, you could make hasty investment decisions. Choosing a predetermined time to regularly check your portfolio and reallocate assets according to medium-term movement is the most common portfolio rebalancing strategy. Another option is choosing to rebalance when your portfolio or certain assets achieve certain quantifiable metrics.

Asset Allocation Is Based on Your Age and Risk Tolerance

A widely acknowledged investment strategy is to tailor your tolerance for risk to your age. Generally, the younger you are, the more you might feel comfortable taking greater risks — and potentially reaping greater rewards — because you may not need to access the money you have invested for years to come, and may have time to recoup losses from risky investments over your lifetime. As you get older, your risk tolerance may go down as you seek investments that provide steady income and look to preserve the capital you’ve accumulated throughout your lifetime.

Setting a strategy is a good way to make sure you’re rebalancing your diversified portfolio based on a specific plan, rather than on emotions or short-term market fluctuations.

Should Your Asset Allocations Include a Crypto Portfolio Component?

As a new asset class, digital assets and cryptocurrencies will take time to integrate fully with the global economy — but they also have a number of advantages over traditional assets. Many cryptocurrencies are not correlated with stocks and bonds, which means that they can help diversify your portfolio and hedge against risk in traditional markets. They also have the potential to bring in remarkable returns, although of course this comes with increased risk and the resulting potential for losses. Ultimately, adding a crypto portfolio component for asset balance is a personal decision based on risk tolerance.

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