Balancing Your Portfolio

Your Investment Objectives and Your Time Horizon

What am I saving for – is it for my retirement or to save for a downpayment on a house? If you are saving for retirement which is over ten years away, a growth assets may be appropriate. If you are saving for the purchase of a house which is two years away, the security of your principal may be your main concern.

Understand Risk and Reward, and Determine your own Risk Tolerance

How much risk am I willing to take? Obviously, your answers about investment objectives and time horizon would affect your risk tolerance. However, another factor which influences risk tolerance is age. Generally, risk tolerance decreases with age. If you’ve been saving for retirement, as that date approaches your time horizon to invest will be shortened. At this point, consider switching to more conservative investments.

Determine the appropriate asset mix for your portfolio

Your tax situation, your liquidity requirements, your income requirements, together with your answers to the previous questions provide the necessary information to develop your appropriate asset mix. Simply put, your asset mix or asset allocation, refers to the way in which you will divide your investments amongst the three basic asset classes: cash, fixed-income, and equities.

For each individual or business, the key to financial planning is to find the balance between an acceptable rate of return and an acceptable level of risk.

If you consider long-term growth with little requirement for investment income as your main objective, and you can tolerate volatile year-to-year returns, and if you have a long time frame to invest of 10 to 15 years, your planning profile should be growth-oriented. Your assets may be more heavily weighted towards equity and then fixed income, and finally cash. *For example, an appropriate asset mix may be: 60% equity, 35% fixed income, 5% cash.

If you consider moderate income and capital growth, avoiding excessive variation from year-to-year as your main planning objectives, and if you have a shorter time frame to needing your assets of 5 to10 years, your profile should be balanced. You should perhaps have a different balance between the asset classes. You might want to should lower your equity component and raise both the fixed income and cash components. *For example, 50% equity, 40% fixed income, 10% cash.

If you consider protection of your capital and stability of year-to-year returns as your main investment objectives, or if you have a very short time frame to invest in less than 5 years, your planning profile should be very conservative. Your plan should be weighted more towards fixed income and cash than equities. *For example, 25% equity, 45% fixed income, 30% cash.

*This information is provided for illustrative purposes and is not intended to provide any financial, legal, tax or accounting advice.