A balanced asset allocation strategy is one in which an individual invests roughly equal amounts of money in both growth and income generating securities. Some investment professionals use the term moderate rather than balanced to refer to this investment strategy. Many investors prefer to use a balanced investment strategy rather than investing primarily in growth instruments such as stocks, or income generating securities such as bonds.
Stocks and other growth securities are often marketed as the best protection against inflation since historic charts show that growth securities typically outpace inflation over long periods of time. In contrast, bonds and income securities tend to roughly keep pace with inflation which means that people who invest in income securities often do not gain any spending power over the course of time. Despite the benefits of growth vehicles, stocks only remain valuable while a firm stays solvent. Additionally, stocks can drop in value if a firm experiences a drop in revenue. Therefore, growth instruments do not usually provide investors with principal protection.
Income securities such as bonds can lose value if the bond issuer becomes insolvent. Nevertheless, laws in many countries are designed to protect bondholders ahead of stockholders. If a publicly traded firm goes bankrupt, the administrators must sell the firm's assets and attempt to honor the firm's obligations to the bondholders. Stockholders claims are only addressed after the bondholders have been paid in full. Therefore, bonds and other debt securities are safer investments than bonds and this safety is the reason that bond prices are less volatile over long periods of time.
Typically, a balanced asset allocation model contains at least 50% stocks. This means that half of the investor's money is exposed to a high level of principal risk but also that the investor has a good opportunity to make a return that outpaces inflation. The other 50% of the money is invested in bonds or debt securities which are less likely to lose value but unlikely to appreciate. In a down market, an investor's losses will be less severe with a balanced asset allocation model than with a growth asset allocation model. On the down side, an investor with a balanced portfolio will only enjoy half of the gains that someone with a growth portfolio will enjoy.
Investment firms sell many different balanced asset allocation mutual funds but some of these funds are better balanced than others. A truly balanced fund contains not just stocks and bonds but also contains securities issued by both big and small companies. Additionally, many balanced funds include both stocks and bonds that were issued domestically and securities that were issued by overseas entities. Investors with global balanced funds are less likely to suffer the adverse affects of an economic downturn that only impacts their home nation.
