Creating a balanced portfolio

Fear gripped the financial markets five years ago as the U.S. and the world suffered through the worst global economic downturn since the Great Depression. Millions of individual investors sold stocks and mutual funds during the crisis and continued liquidating through 2012 for fear of another downturn.

Yet on Friday, January 26, 2013, the Wilshire 5000 Index hit an all-time record high, breaking through the previous record set on October 9, 2007. This proxy of the total U.S. equity market, which includes large companies and small, was up 131.52 percent or $10.8 trillion from the low on March 9, 2009. This gain doesn’t include dividends or dividend reinvestment over the period.

Investors that sold during the crisis and stayed out have missed a precious opportunity to recover their losses and earn respectable profits in the stock market. These opportunities don’t come often and they certainly will not come as easy in the future.

There were many individuals who managed well during the market collapse and its subsequent recovery. I’m not talking about the Wall Street bankers who made millions in golden parachutes or a select group of hedge fund managers who shrewdly shorted sub-prime mortgages. I am speaking of average investors who did an above-average thing during the financial crisis – they didn’t panic. Instead, they maintained their discipline and held a balanced portfolio of stocks and bonds.

The buy, hold and rebalance approach to investing is one of the simplest and most effective ways to diversify and prosper in the financial markets over the long-term. A portfolio is allocated based on each investor’s needs across different asset classes such as stocks, bonds and real estate. The portfolio mix is maintained periodically using rebalancing.