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The key to successful investing is striking the perfect balance between risk and reward for each individual.
The unfortunate truth with investing today however, is that many investors end up taking on too much risk (or not enough risk) and quickly become unsatisfied with the extreme volatility or lack of returns within their portfolio.
To help our readers better understand what is considered moderate risk investments, as well as how to actually build a portfolio around a medium level of risk, today’s article is designed to give you everything you’ll need to build your own medium risk portfolio.
More specifically, we’ll talk about some different investments to consider – from growth stocks and mutual funds to bonds and cash – and discuss how to effectively combine them.
We will also provide a sample medium risk portfolio for review and provide some essential risk management strategies – such as portfolio rebalancing and navigating market fluctuations – to help ensure you stay calm and balanced regardless of how financial markets move.
Intro to Moderate Risk Investments
At the heart of every investment strategy is the balancing act between risk and reward. Moderate risk investments sit comfortably in the middle of this spectrum, offering a balanced approach that appeals to a wide range of investors.
But what exactly defines a moderate risk investment?
Typically, these are investments that offer a reasonable expectation of returns with a controlled level of risk and volatility, making them ideal for individuals who are neither overly conservative nor excessively aggressive in their investment approach.
Balancing Risk and Reward
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There are countless ways in which investors can find the right amount of risk for their portfolio, however, the best way of building a properly risked portfolio, is to build out your investments in chunks.
What I mean by this, is building sections within your portfolio, for high, medium, and low risk assets.
As an example, perhaps 20% of your overall capital would go towards higher risk investments, 60% would go towards medium risk assets, and the final 20% would be put towards low risk/low volatility investments.
Thinking about your portfolio in different sections based on risk, can be a very simple yet effective way to make sure the overall risk of your portfolio stays within the medium range.
Different Medium Risk Investments to Consider
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When building a medium risk investment portfolio, it is important to explore a variety of different investments, as each will have a different balance between risk and potential return.
Below, we’ll touch on some popular investment options amongst retail investors, ranging from higher-risk choices like small caps to assets that are considered extremely low risk like
Growth Stocks/Small Caps
Growth stocks (which are often small caps) represent shares in companies that are expected to grow at an above-average rate compared to other companies in the market. These companies usually reinvest their earnings back into the business, fuelling further growth and expansion.
While growth stocks can offer high returns, they also come with increased volatility and risk. They are suitable for investors who are willing to tolerate some level of volatility and are ok with having a part of their portfolio contain some speculative investments.
Dividend Stocks
Whereas growth stocks reinvest
These companies are typically well-established with a history of financial stability. Dividend stocks provide a steady income stream and are generally less volatile than growth stocks, making them a good option for moderate risk portfolios. They are particularly appealing to investors looking for regular income alongside capital appreciation.
Mutual Funds
Mutual funds are investments that gather
By choosing to invest in mutual funds, investors get the advantage of diversification, as well as professional management, making this a great option for medium risk investors. Better yet, different mutual funds have varying levels of risk, meaning regardless of how much risk (or how little risk) an investor wants to take on, there will be a mutual fund that fits within any risk profile.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds, or ETFs, are similar to mutual funds in that they pool investor
Bonds
Bonds are debt securities where the issuer is obligated to pay the bondholder interest and repay the principal at a later date. They are generally considered lower risk compared to stocks, but corporate bonds and/or high-yield bonds offer higher returns with a moderate level of risk. Bonds can be an excellent way to add stability and income to a medium risk portfolio.
Money Market Funds
Money market funds invest in high-quality, short-term debt securities. They are known for their low risk and provide modest returns, making them ideal for short-term investments or as a part of a diversified portfolio.
Cash
Holding cash or cash equivalents, such as treasury bills, is the most liquid form of investment. While it offers no risk, the return is non existent, especially when considering inflation. That being said, a proper portfolio should always contain some cash, in case new investment opportunities arise, or a financial emergency happens.
The Moderate Risk Investment Portfolio
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It’s one thing to talk about medium risk investments, though it’s an entirely different thing to actually build a medium risk portfolio.
To help our readers understand what a possible moderate investment portfolio would actually look like, here we will construct a sample moderate risk portfolio with a $100,000 investment.
SOXX Semiconductor ETF (10% – $10,000)
The SOXX Semiconductor ETF is a fund that invests in the semiconductor sector, which includes high flying technology companies like AMD, ON, and Lam Research. This sector is known for its growth potential, driven by the increasing demand for electronic devices and powering artificial intelligence. By allocating 10% to the SOXX ETF, we will benefit from the growth potential of new tech without overexposing the portfolio to the sector’s volatility.
NASDAQ 100 (10% – $10,000)
The NASDAQ 100 tracks 100 of the largest non-financial companies listed on the NASDAQ stock exchange. It’s known for its concentration in technology stocks, but also includes companies from other sectors.
This investment offers exposure to some of the most innovative and high-growth companies in the world today. Again, we will go with a 10% allocation to balance the high-growth potential with the inherent risk of market fluctuations.
Dividend Paying Mutual Fund (25% – $25,000)
For the dividend component, let’s consider a mutual fund like the Vanguard Dividend Growth Fund (VDIGX). This fund prioritizes companies that not only pay dividends but are also capable of growing their dividends over time. A 25% allocation to a dividend-paying mutual fund provides a steady income stream with still some potential for capital appreciation, while also reducing overall portfolio volatility.
Long-Dated Bonds (20% – $20,000)
Long-dated bonds, such as those with maturities of 10 years or more, offer a balance between higher yield and stability. They are less sensitive to short-term market fluctuations and provide a predictable interest payment. By allocating 20% to long-dated bonds, we’ll add a strong layer of stability to the portfolio, cushioning it against any stock market downturn.
Certificates of Deposit (CDs) (20% – $20,000)
Certificates of Deposit are low-risk financial instruments offered by banks. By locking in
Cash (15% – $15,000)
Keeping 15% of the portfolio in cash or cash equivalents gives us the liquidity, flexibility, and safety we need. This allocation is crucial for managing unforeseen expenses or taking advantage of new investment opportunities without disrupting the rest of the portfolio. It also acts as a buffer against market downturns, reducing overall portfolio risk.
Obviously, the above is just one example of how an investor could blend risk with reward when investing.
The goal of this portfolio is to still enjoy the high capital returns of equities, while adding in just enough fixed income assets to create some cash flow, as well as balance out volatility.
Risk Management Strategies
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Managing risks effectively is crucial for the health and success of any investment portfolio regardless of the level of risk.
With this in mind, let’s go over some tools and techniques for risk management, talk about the importance of regular portfolio reviews and rebalancing, and highlight some strategies for dealing with market volatility.
Tools and Techniques for Managing Risks
- Diversification: By spreading investments across various asset classes and sectors, you can mitigate risk substantially. Our moderate risk portfolio achieves this through a mix of ETFs, mutual funds, bonds, CDs, and cash.
- Asset Allocation: Market movements can shift the balance of your portfolio significantly, which will inevitably expose you to higher risk. Having set allocations for each section of your portfolio is a necessity for proper risk management.
Importance of Regular Portfolio Reviews and Rebalancing
- Scheduled Reviews: Regular portfolio reviews, whether quarterly, semi-annually, or annually, are crucial. These reviews allow you to assess performance, examine the relevance of your investments, and make necessary adjustments.
- Rebalancing: Over time, some investments may outperform others, leading to an imbalance. Rebalancing, which involves selling or buying assets to return to your original allocation, helps maintain your risk level long term.
- Adjusting for Life Changes: Changes in your life, such as career transitions or family growth, can impact your risk tolerance and investment goals. Your portfolio reviews should reflect these life changes, adapting your investment holdings as needed.
Dealing with Market Volatility
- Avoid Emotional Investing: It’s critical to avoid impulsive decisions based on short-term market movements. Stick to your long-term investment strategy and don’t let emotions drive your decisions.
- Dollar-Cost Averaging: This is a strategy where you invest a fixed amount of
money at regular intervals, regardless of market conditions. It helps in reducing the impact of volatility, as you buy more shares when prices are low and fewer when prices are high, averaging out the cost-basis over time.
Wrap Up
Creating and managing a moderate risk investment portfolio involves a thoughtful balance between various asset classes and a commitment to regular assessment and adjustment.
Our example of building a $100,000 sample portfolio has hopefully highlighted the importance of diversification across stocks, ETFs, mutual funds, bonds, CDs, and cash. Each investment type brings unique benefits and risks, contributing to the overall stability and growth potential of the portfolio.
Key to this process is the implementation of risk management strategies like diversification, regular portfolio reviews, rebalancing, and techniques like dollar-cost averaging to navigate market volatility.
Remember, an effective investment strategy is dynamic, adapting to changes in your life circumstances, market conditions, and financial goals.
All told, the key to experiencing investing success is creating a game plan and sticking to it. Building a moderate risk portfolio is easier said than done, however, this article should give you everything you need to get started.
As you become more confident as an investor, you can start to adapt your strategy, potentially take on more risk, and build a unique portfolio that best aligns with your specific investment goals.
Disclosure/Disclaimer:
We are not brokers, investment, or financial advisers; you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. The company provided information in this profile, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.
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