What Is a Financial Portfolio?
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).
People generally believe that stocks, bonds, and cash comprise the core of a portfolio. Though this is often the case, it does not need to be the rule. A portfolio may contain a wide range of assets including real estate, art, and private investments.
You may choose to hold and manage your portfolio yourself, or you may allow a money manager, financial advisor, or another finance professional to manage your portfolio.
Anatomy of a portfolio
Simply put, it’s a collection of financial assets. It could contain a number of financial products like stocks, bonds, cash and cash equivalents, alternative investments, even life insurance, property or other assets.
In an investment portfolio these are called “asset classes.” You’ll want to have a mix of different asset classes in your investment portfolio to balance the potential for growth and the risk that you’ll lose money. This is an approach known as diversification – holding different types of securities that will perform differently than one another depending on varying market conditions.
Types of Portfolio Investment
Here is a list of popular portfolio types. However, remember that one portfolio type may not meet all your financial needs. You may need to mix and match specific types of portfolio investments to arrive at the combination, which is ideal for you.
The Aggressive Portfolio
Aptly named, an aggressive portfolio is aggressive because it aims for higher returns and often undertakes higher risks to achieve this objective. Generally, this portfolio includes several high beta stocks. These stocks show higher fluctuations as compared to the overall market.
The Defensive Portfolio
On the contrary, a defensive portfolio doesn’t comprise of stocks with a high beta value. Such shares generally stay unaffected by market movements. These stocks are pretty safe to invest in as they involve minimal risk.
The Income Portfolio
An income portfolio focuses on gaining from dividends or other recurring benefits provided to shareholders. Though it has quite some commonalities with a defensive portfolio, one significant difference is that it banks on stocks with relatively higher yields.
The Speculative Portfolio
The speculative portfolio requires a high-risk appetite, so much so that it is often compared to gambling. Here, the portfolio is not just aggressive but is also a bet on what product or service offering could work very well in the future. Initial Public Offers (IPOs) or takeover targets fit well into the speculative portfolio type.
The Hybrid Portfolio
As the name suggests, such a type of portfolio commands you to invest in an amalgamation of asset types with varying fundamentals to earn the best of both growth and dividend-yielding investments.
How to Build a Complete Financial Portfolio
Most people have a general idea of how they want to spend their later years. Not many ever stop and figure out how they will financially achieve their desired lifestyle.
There are several considerations for retiring comfortably. At a minimum, you should work to fully fund your retirement account(s), own your home, have no debt, and have emergency funds set aside.
This step-by-step guide empowers you to take control of your retirement plans by building a holistic financial portfolio.
- Start by Taking Stock
- Fund Your 401(k) With Matching Funds
- Pay Off High-Interest Credit Card Debt
- Fully Fund a Roth IRA
- Purchase a Home
- Build Your Emergency Reserves
- Pursue Other Investment Opportunities
- Invest in Yourself
- Save for Your Children’s Education
- Stay the Course
5 Steps to Building Your Portfolio
Here are six steps to consider to help build the appropriate portfolio for you.
Step 1: Establish Your Investment Profile
No two people are exactly alike. So, when creating a portfolio, consider establishing your investment profile that is unique to who you are. In a nutshell, that profile should include what are your goals and what is the time horizon for those goals.
Step 2: Allocate Assets
Your asset allocation is your portfolio’s basic investment mix of individual stocks and bonds, mutual funds, exchange-traded funds (ETFs), with perhaps smaller stakes in other investments and cash.
Step 3: Decide how to diversify
Now that you have settled on a basic mix of stocks, bonds and other asset classes, you’ll need to drill down a little further and consider how you want to diversify within these asset classes.
Step 4: Select investments
Once you have an asset allocation and diversification plan, picking individual investments may become easier, because you know which buckets you want to fill and what your target portfolio percentage is for each.
Step 5: Consider Taxes
As you buy investments to build your desired portfolio, you need to decide which of your accounts should purchase these investments.
Monitor your portfolio : Top Portfolio Management Apps
Your portfolio might include any combination of financial assets, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), 401(k)s, and individual retirement accounts (IRA).
Keeping track of all these assets can be a challenging, if not daunting, task. It’s important to routinely know what’s going on with all your investments—not just once a year when you get your tax forms.
Personal Capital Finance
Platform: iOS, Android, Amazon
More than three million people track their finances with Personal Capital, which has more than $22 billion in assets under management (AUM) as of April 30, 2022.
SigFig Wealth Management
Platform: iOS, Android
SigFig’s Wealth Management app can help you track all your investment accounts for free. There is also a fee-based version that allows investors to create a personalized plan that incorporates your risk tolerance and time horizon, but charges 0.25% per year. However, you can get your first $10,000 managed for free.
Platform: iOS, Android
Cost: Limited free version and fee-based options
Sharesight is a portfolio tracker that can monitor the performance of your investments using data that’s imported from 40 stock exchanges. The service is free for up to ten holdings or one portfolio with limited reporting. Those with more than ten investments who want additional reporting features can opt for the fee-based service, which ranges from $11.25 to $23.25 per month (billed annually).
Platform: iOS, Android
The Yahoo Finance app has a simple-to-use design, so you can easily track your stocks, commodities, bonds, and currencies. You can create and track the performance of your personal portfolio and sync multiple portfolios across all your devices.
The Best Financial Moves to Make
According to Joseph Montgomery, as Managing director, investments, The Optimal Service Group of Wells Fargo Advisors :
Right now, we have an opportunity to rebalance with much broader diversification than was available during similar times in the past. In 1987, pretty much nobody knew what a hedge fund was.
Thirty years ago, no one was paying attention to international investments. Today, we have an incredible array of investments to broaden your mix as we do the rebalancing that we should all be doing periodically. Diversification and rebalancing don’t sound very sexy. But look at 2020; we saw a huge break in the market, with stocks down about 37%.
If you had a more broadly based portfolio, including certain alternative exposure, and you didn’t do anything but rebalance quarterly, you were up about 14% for the year.
The great thing for people today is that there has been a democratization of investing. You can invest across a spectrum, and the tool kit in the alternative space is very broad if it’s used as part of an appropriate allocation. Make sure you’re taking advantage of it. You can also do very tax-efficient investing for the long term, even using mutual funds and exchange-traded funds.
A financial portfolio is a collection of assets an individual owns, typically including stocks, bonds and cash. Having a range of different assets in your portfolio can help protect you from financial ups and downs. Here’s what you should know about building a financial portfolio that works for you.