BUILDING A BALANCED
INVESTMENT PORTFOLIO

Whatever your investment goals are, deciding to build a diversified investment portfolio is one way to increase your chances of success. There is no single correct way of investing, but following a few simple guidelines can make the whole investment process more methodical.

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Building a balanced investment portfolio involves diversifying your investments across different asset classes and considering factors like your financial goals, time horizon, and risk tolerance.

Understanding how to create and maintain a portfolio that balances growth potential with risk management is an essential part of putting yourself in the best possible position for potentially meeting your financial aims.

A Guide to Creating a Balanced and Diversified Portfolio

Watch this video to understand how to build a balanced, diversified portfolio.

A balanced portfolio combines different types of assets in proportions that align with your investment goals, while diversification spreads investments across various markets, sectors, and regions to reduce risk. Used together, the two approaches form the cornerstone of sensible investing.

The key components of a balanced portfolio could include:

• Growth stocks – for potential capital appreciation.
• Dividend stocks – for income and the compounding effect.
• Bonds – for income and stability.
• ETFs – for instant diversification and low cost tracking of markets
• Alternative assets – such as commodities, currencies and crypto for additional diversification. 

The aim of this approach is that if one type of asset sees a significant drop in value, the value of your diversified portfolio might not be as hard hit. For example, the share market might experience a price correction at the same time that crypto markets rally.

How Can You Start Building Your Own Investment Portfolio?

Before investing, consider four key questions: your financial goals, risk tolerance, time horizon, and available capital. An understanding of these factors and how they interact can be used to shape your investment strategy and portfolio composition.

Building an investment portfolio begins with self-assessment. Understanding your personal circumstances and objectives provides the foundation for making informed investment decisions that align with your needs.

What are your financial goals?

Your financial goals determine the core principles and direction of your investment strategy. Whether you’re saving for retirement, a house deposit, or your children’s education, each goal requires a different approach. 

• Short-term goals might favour more conservative investments.
• Long-term objectives can accommodate higher-risk assets with greater growth potential.

What is your risk tolerance?

Risk tolerance refers to your ability and willingness to endure fluctuations in your investment values, and understanding it will help guide you to pick investments that align with your personal preferences. By assessing your risk tolerance, you can strike the right balance between risk and reward. Consider:

• Your psychological resilience to volatility
• Your capacity to dedicate time to be able to manage your portfolio.
• Your capacity to absorb potential financial losses. 

What is your time horizon?

Your time horizon, the amount of time you have for your investments to mature, will significantly influence portfolio construction. While personal circumstances (and timelines) may change, there is value in understanding the logic between two key approaches. 

• Longer time horizons generally allow for more aggressive strategies, as there’s time to recover from market downturns. 
• Shorter horizons necessitate more conservative approaches to preserve capital.

Younger investors often have higher risk tolerance due to them having a longer time horizon and being able to be patient while investments mature. Those nearing retirement typically prefer stability as they prioritise greater certainty over shorter-term investment outcomes.

How much capital do you have available?

It is important to establish a realistic idea of the amount of capital available for investing as this will affect your diversification options and investment choices. 

Starting with smaller amounts doesn’t prevent effective portfolio building – many investment vehicles now offer low minimum investments, allowing beginners to build diversified portfolios gradually.

What Is Capital Allocation?

Capital allocation is the process of distributing your investment capital across different asset types, typically shown as percentages of your total portfolio value. This fundamental concept determines your portfolio’s risk-return profile and overall performance potential.

Asset allocation describes how an investor’s capital is spread across different assets, such as stocks and bonds. The table below outlines some of the asset classes which could be invested in and the role they might play in a balanced portfolio.

Asset type	What it is	Common role in a portfolio	Notes
Stocks	Ownership shares in companies	Growth and capital appreciation	Higher volatility, higher potential returns
Bonds	Loans to governments or companies	Income and stability	Lower volatility, predictable returns
ETFs	Baskets of various investments	Instant diversification	Can include stocks, bonds, or commodities
Cash	Money market funds, savings	Liquidity and safety	Low returns, protects against volatility
Commodities	Physical goods like gold, oil	Inflation hedge, diversification	Can be volatile, often uncorrelated to stocks

As long as you understand the potential risks attached to over- or under-allocating to certain assets, there is not necessarily a right or wrong way to go about this process. The breakdown should instead reflect your investment profile and aims.

Are There Different Types of Investment Portfolio Allocations?

Portfolio allocations typically fall into three broad categories – aggressive, moderate, and conservative. Each approach has its own distinct characteristics suited to different investor profiles and goals.

Understanding these allocation styles helps investors choose an approach that matches their circumstances. These are general frameworks rather than rigid rules, and many investors adjust their allocation over time.

Conservative portfolio allocation

Conservative portfolios emphasise capital preservation through heavy allocation to bonds and cash, with limited exposure to volatile assets.

A conservative portfolio allocation focuses primarily on capital preservation and is generally composed of what are considered to be low-risk investments. These assets may be less impacted by changing economic cycles and major events. This approach typically suits investors nearing retirement or those with low risk tolerance.

The key characteristics of conservative portfolio allocation are: 

• Majority allocation to fixed income and cash. 
• Limited stock exposure, often in large, stable companies. 
• Lower returns but greater stability and predictable income.

Moderate portfolio allocation

Moderate portfolios balance growth potential with stability by combining meaningful allocations to both stocks and bonds.

Moderate portfolio allocations are generally more finely balanced between stocks and bonds, with smaller allocations of cash and other more volatile assets. This middle-ground approach appeals to many investors seeking steady returns without extreme volatility.

The key characteristics of moderate portfolio allocation are: 

• Roughly equal splits between growth and defensive assets. 
• Includes both domestic and international investments. 
• Suitable for medium-term goals and average risk tolerance.

Aggressive portfolio allocation

Aggressive portfolios prioritise growth through high exposure to stocks and other volatile assets, accepting greater risk for potentially higher returns.

An aggressive portfolio will usually have assets that can lead to greater gains more quickly, but also might come with greater risks. For instance, many of the stocks in an aggressive portfolio will be focused on fast growth. This approach suits investors with longer time horizons and higher risk tolerance.

The key characteristics of aggressive portfolio allocation are: 

• Heavy weighting towards growth stocks and emerging markets. 
• Minimal allocation to bonds or cash equivalents. 
• Higher volatility with potential for significant gains or losses.

The differentials between the three approaches may blur, and as market events unfold higher risk assets may become lower risk, and vice versa. The table below provides a summary of the three approaches and what they might represent in a real-life portfolio.

Allocation style	Typical characteristics	Example ranges
Aggressive	High growth focus, accepts volatility	80-95% stocks, 0-15% bonds, 0-10% cash
Moderate	Balanced growth and stability	50-70% stocks, 20-40% bonds, 5-15% cash
Conservative	Capital preservation priority	20-40% stocks, 50-70% bonds, 10-20% cash

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

How Can You Create a Balanced Portfolio?

Creating a balanced portfolio requires diversification across markets, adaptability to new opportunities and risks, and regular rebalancing to maintain your target allocation.

Building a truly balanced portfolio extends beyond simply mixing stocks and bonds. It requires thoughtful diversification across multiple dimensions and ongoing management.

Diversifying across markets

Geographic and sector diversification reduces concentration risk by spreading investments across different economies and industries. This approach protects against country-specific risks and sector downturns. 

Case Study: Regional diversification

One good way to create balance in your portfolio is to have exposure to markets in your local country as well as elsewhere in the world. For example, if you are an Australian planning on including indices as part of your portfolio, you could consider investing in both the ASX 200 Index and the S&P 500 Index to include both the domestic market and the US market.

Adapting to new investment types

Effective planning should factor in the potential need for a portfolio to evolve with changing markets, incorporating new asset classes and investment vehicles as they become available.

If you hold your portfolio over a number of years, different types of assets might become more helpful in keeping it balanced. This could include adapting to not only different types of investments, but also traditional options that you previously had not invested in.

Rebalancing your portfolio

Regular rebalancing maintains your desired asset allocation by adjusting positions that have drifted from their targets due to market movements.

Part of creating, and keeping, a balanced portfolio is being willing to rebalance as needed. Rebalancing your portfolio is important in maintaining your desired exposure and in ensuring that your asset allocation aligns with your risk tolerance and investing objectives.

Case Study: Portfolio Drift and Rebalancing

1. An investor sets their initial allocation as 60% stocks and 40% bonds.
2. The stock sector outperforms.
3. Differences in respective price moves mean the portfolio is now split into 70% stocks and 30% bonds.
4. The investor can sell some stocks and buy bonds to return to the 60/40 target allocation.
5. Alternatively, the investor rebalances not by selling stocks but by allocating 100% of all future allocations to bonds until the 60/40 target is achieved.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

Final thoughts 

Building a balanced investment portfolio minimises risk by spreading capital across various asset classes like stocks, bonds, and ETFs based on individual financial goals and risk tolerance. As market conditions and personal situations do change, it should be thought of as an ongoing process.

Key factors to consider include personal time horizons and risk appetites, and that portfolios are typically classified as aggressive, moderate, or conservative to align with personal investment aims.

Visit the eToro Academy to learn more ways to build an investment portfolio which suits you.

Quiz

FAQs

What does “balanced portfolio” mean?

A balanced portfolio strategically combines different asset types in proportions designed to achieve steady growth while managing risk. It typically includes both growth-oriented assets (like stocks) and defensive assets (like bonds) to provide stability through various market conditions.

What is concentration risk?

If your portfolio contains a high concentration of one type of asset, your risk levels increase. Concentration risk occurs when too much capital is invested in a single asset, sector, or region, making the portfolio vulnerable to specific adverse events.

What’s the difference between asset allocation and diversification?

Asset allocation describes how an investor’s capital is spread across different assets, such as stocks and bonds, shown as percentages. Diversification goes further by spreading investments within each asset class across different sectors, regions, and securities to reduce concentration risk.

What is rebalancing and why do investors use it?

Portfolio rebalancing involves buying and selling financial instruments so that the overall structure of your portfolio remains inline with your investment strategy. Investors rebalance to maintain their target risk level and potentially enhance returns through disciplined buying and selling.

How can ETFs contribute to diversification?

By investing in ETFs (Exchange Traded Funds), you get the opportunity to invest in a broad market index or a specific sector, providing easy portfolio diversification. A single ETF can contain hundreds or thousands of individual securities, offering instant diversification more efficiently than buying individual stocks.

How is asset allocation decided?

Asset allocation is simply the percentage of each type of asset that your investment portfolio contains. When allocating your assets, consider your age and investment aims. Single investors in their 20s will have a drastically different investment portfolio than someone in their 40s or 50s who plans on retiring soon.