In early 2008, 62% of Americans had interests in the stock market, according to Gallup data. However, this number fell considerably to just 35% in 2015, perhaps due to the pinch of the financial crisis just seven years ago. Around the same time (2015), 55% of American households said they had money in savings accounts.
Clearly, there seems to be a back and forth relationship between savings and investments. Americans are seemingly comfortable with investments when the economy is doing well and the risk of losing money is low. Nevertheless, the appetite for investments tumbles the moment cracks emerge in the economy. Investing does not have to be risky all the time. In fact, you can de-risk your investment portfolio by balancing it out. How can you do this?
Diversify your portfolio
This is an age-old strategy that investors use to balance their portfolio. Typically, a balanced portfolio is one which contains assets that spread evenly along the continuum of risk. That is, a portfolio that has assets spread from high-risk to low-risk, liquid to illiquid, short-term to long-term.
You can also achieve diversification by investing in different asset classes. Typically, investors have access to three different types of asset classes in which to put money. First, there are shares/stocks or what investors call the equities market. This asset class encompasses other assets like ETFs and Mutual Funds. Second, there are government bonds, corporate bonds and treasuries. These instruments comprise the fixed income category of asset classes. Compared to equities, bonds are less risky but more illiquid.
Third, you could put money in a money market fund or keep it under your mattress. While the two could be described as similar in terms of asset class categorization, money market funds or MMF earn an interest unlike putting money under a mattress, which actually depreciates in value due to inflation.
Read More: Learn To Trade – Trading Guide for Beginners
Saving and investing simultaneously
Another trick you can use to build a balanced portfolio is through mixing investing and saving. Typically, investing has higher returns but the risk is high. Notably, it is possible to grow $100 to $10,000 within two years on the NYSE. However, it is also possible to lose all the $100 in a matter of days.
Putting money in a savings account could help you to beat the risk losing the funds. Usually, banks that provide savings accounts services are members of the Federal Deposit Insurance Corporation. The FDIC compensates savers in case the institution is unable to pay. Therefore, mixing savings and investments could your best strategy to build a balanced portfolio.
