Balanced Investment Strategy - Explained
What is a Balanced Investment Strategy?
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Table of ContentsWhat is a Balanced Investment Strategy?How Does a Balanced Investment Strategy Work?Balanced Investment Strategy VersusCapital Preservation, Current Income, and Riskier Growth-Oriented StrategiesAcademic Research on Balanced Investment Strategy
What is a Balanced Investment Strategy?
A balanced investment strategy seeks to balance the risk and return of a portfolio by investing an equal amount of money on high-risk and low-risk securities. The ideology behind this portfolio allocation strategy is that while the high-risk securities will fetch the investor the highest amount of returns, the low-risk securities will offer the minimum risks, thereby balancing the risk and return of the investment. Using a balanced investment strategy entails that a portfolio is equally divided into equities and fixed-income securities, that is, the portfolio comprises both income-producing securities and growth investments.
How Does a Balanced Investment Strategy Work?
The balanced investment strategy offers many benefits to investors. Primarily, it allows them to take advantage of the upward movement of the market, without losing everything when there is a downturn. Investors achieve this by investing in high-risk and low - risk securities equally. The high-risk securities offer high yield while the low-risk securities offer low yield, thereby creating a balance in the risk and return an investor gets from a portfolio. While a balanced investment strategy is often referred to as an aggressive strategy, it guarantees capital retention for investors.
Balanced Investment Strategy VersusCapital Preservation, Current Income, and Riskier Growth-Oriented Strategies
There are other strategies that investors and portfolio managers use for an effective allocation of investment in a portfolio aside from the balanced investment strategy, these are;
- Capital Preservation: This strategy helps investors maintain a good capital level by guaranteeing return in a portfolio and also preventing losses.
- Current Income: This portfolio allocation strategy entails the selection of investments that offer returns that are above the average returns. It is focused on the income an investor can derive from a portfolio, which can be in the form of dividends or interests.
These strategies are not aggressive and risky in nature like growth-oriented strategies. For instance, the capital growth strategy that aims to increase the value of an investment over a period of time, this strategy seeks a high return in an aggressive manner, while preventing losses.
Academic Research on Balanced Investment Strategy
- Balanced skills and entrepreneurship, Lazear, E. P. (2004). Balanced skills and entrepreneurship.American Economic Review,94(2), 208-211.
- China's human capital investment, Heckman, J. J. (2005). China's human capital investment.China Economic Review,16(1), 50-70. This paper discusses human capital investment in China. China's current policies favor physical capital investment over schooling and urban human capital investment over rural human capital investment. Current migration policies discriminate against children of migrants. A more balanced investment strategy across rural and urban regions and types of capital is appropriate. Private funding for education through tuition and fees should be encouraged and can supplement government funding and make schools more financially self-sufficient. However, if this policy is enacted, capital markets for financing education need to be developed to avoid discouraging students from poor families from attending school.
- Balanced or unbalanced development: special economic zones as catalysts for transition, Litwack, J. M., & Qian, Y. (1998). Balanced or unbalanced development: special economic zones as catalysts for transition.Journal of Comparative Economics,26(1), 117-141. We develop a theory for a transition economy under which an unbalanced development strategy that favors special economic zones emerges as a response to two critical problems: (1) political pressure to satisfy certain social expenditure requirements and (2) the lack of institutions to constrain the state from expropriation. By promoting the concentration of resources in some areas, a low equilibrium trap can be avoided, while important spillover effects may be generated elsewhere. The experience of China with special economic zones and coastal open areas is interpreted in this light. Some problems in the Russian economy are also discussed in the context of this theory.J. Comp. Econom.,March 1998, 26(1), pp. 117141. Stanford University, Stanford, California 94305-6072.
- The exit rates of liquidated venture capital funds, Laine, M., & Torstila, S. (2005). The exit rates of liquidated venture capital funds.The Journal of Entrepreneurial Finance,10(1), 53-73. Exit rates provide a simple yet practical measure for evaluating and benchmarking the performance of venture capital funds. We create a sample of 138 liquidated U.S. venture capital funds and investigate the outcomes of their 4,549 portfolio companies. We study exit rates, proportions of different exit routes, and their determinants. The median fund in our sample exited 19% of portfolio companies through an IPO, 7% through a sale of listed equity, and 23% through mergers or acquisitions. There exist, however, interesting differences between fund types: In particular, large funds and fund management firms have significantly higher exit rates.
- Balanced skills and the city: An analysis of the relationship between entrepreneurial skill balance, thickness, and innovation, Bublitz, E., Fritsch, M., & Wyrwich, M. (2015). Balanced skills and the city: An analysis of the relationship between entrepreneurial skill balance, thickness, and innovation.Economic Geography,91(4), 475-508. Entrepreneurs are assumed to be multiskilled, covering a number of skills and achieving in each skill a level as high as possible. Being such a jack-of-all-trades increases the probability of running an entrepreneurial venture successfully, but what happens to the jack-of-few-trades who lacks sufficient skills? This article investigates a possible compensation mechanism between balanced skills and cities and how this compensatory measure relates to performance. Specifically, we test and find support for the idea put forward by Helsley and Strange that high market thickness, such as that found in cities, can compensate for a lack of entrepreneurial skill balance. The results indicate that entrepreneurs with low skill balance benefit more from being located in cities than their counterparts with high skill balance. Innovative firms do not differ from other businesses in this respect.