After the equities market fell 35% in one month, a balanced portfolio looked like the best thing since sliced bread. Of course, that’s always been the case. But if you were ignoring other asset classes because stocks were producing great returns, you are still in a world of hurt.
Even though the markets have bounced back, going all-in on equities – or any asset class – is a shaky investment strategy at best. All successful long-term investors know that the path to wealth is paved with a balanced portfolio that reduces market risk.
A balanced portfolio will help you sleep at night
Most indices and stocks are still down YTD, so you still might not be sleeping well at night. Yes, stocks have moved up from their lows, but you can only take advantage of great buying opportunities if you have plenty of cash available. If you don’t, you are probably still kicking yourself.
Let’s not forget about the Federal Reserve’s role in this recovery. Their unprecedented stimulus has helped prop up the stock market so it could regain its footing. But if another disaster strikes like this pandemic, could they undertake a similar effort to stem the rising tide? It’s not likely.
This is my long way of saying that you don’t want to rely on one asset class or institution to grow your wealth.
The SPX 500 is down about 7.2% in 2020. A balanced portfolio of equities, bonds, cash, gold, and real estate holdings would have helped you avoid the stress of the volatile stock market. Consider spreading your risk by holding assets in the following ratio:
- Equities – 45%
- Fixed income – 25%
- Cash – 15%
- Gold – 10%
- Real estate – 5%
Bonds in particular have been a safe haven. When the Fed brought rates down to zero, their intention was to hold rates down for a long period of time. This provides bond investors with fixed income, even during the wildest swings of the stock market. Long-term bonds are now up more than 25% in 2020.
Gold and silver have also performed well, with gold up a strong 16% this year. Real estate assets are also quite strong, with mortgage backed securities showing some nice gains.
If you have this mix of assets in your portfolio, you are outperforming the indices by a mile – and you are sleeping well at night.