Daring to Dream: How to Build a Well-rounded Financial Portfolio

A well-rounded and maintained portfolio is important to any investor, especially with the current state of the financial marketplace. Investors need to determine the right asset allocation,create an investment strategy to balance risk and reward, as well as apportion a portfolio’s assets according to an individual’s goals about the investment horizon.

The key question that needs to be answered is, “What are the future capital requirements that should be met?” Once this is answered, a portfolio can then be built , according to the recommended investment strategies.

Asset Allocation

The first step in creating a well-rounded portfolio is to determine an investor’s financial situation. Vital factors to consider are age, or how much time there is to grow the investments; the amount of capital that can be invested; and future income needs. All of these must then be aligned with the predetermined investment goals.

Age

Age is the first consideration in determining an investment strategy. A young professional at the start of his or her career will have broader options in terms of investment, as opposed to a 50-year old who is planning for retirement, and is also paying for his or her child’s college education.

Risk tolerance

An investor’s risk tolerance should also be considered to ascertain the amount that may be invested. If the individual is unmarried with no dependents, and is far from the retirement age, he or she may be able to be more open to taking risks. As such, his/her investment strategy may include moderate to high-risk investment options that assure the possibility of greater returns despite the equally large risk of losses. For those that may not have a sizable income, but still wish to foray into investing, a more conservative investment plan can be considered.

Personality

Apart from age and income, an investor’s personality may play a role in his/her investment style. In the same way that personalities may be divided into conservative, balanced, and aggressive types, investors can also be classified under the same buckets. For example, if an individual is fearless, and is comfortable with incurring potential losses at the prospect of a bigger future tradeoff, then may adopt a more aggressive investment strategy. Those that are more prudent, on the other hand, may choose to invest in traditional investment products, because their income generation potential, albeit smaller, are tried and tested.

Fulfilling the Strategy

Assets and securities need to be carefully selected to meet the goals of the asset allocation strategy, which is a method that strives to balance risks with rewards by consistently reviewing and adjusting the capital allocation of assets within an investment portfolio, based on the investor’s goals and risk tolerance.

Here are the different ways that assets and securities may fulfill an asset allocation strategy:

Stocks

Investing in the stock market can be considered as an aggressive investment method, largely due to the volatility of the market. When investing in stocks, an investor must consider factors such as market cap, sector, and stock type.

To gain more information about a company prior to purchasing their stocks, investors can analyze the background and historical performance of these organizations by way of stock screeners-- this is a tool that investors and traders use to filter companies based on user-defined metrics. Some websites and platforms offer these for free, or for a small subscription fee.

The key is to shortlist potential stock options so that a more thorough analysis of both opportunities and risks can be conducted.

It is important to note that investing in stocks is one of the most work-intensive methods of diversifying an investment portfolio, as it requires regular monitoring of price movements and market developments. Stock market investors need to be on top of industry and company news, especially if they wish to know when the best time is to buy and sell stocks.

Bonds

Compared to stocks, investing in bonds is a less risky investment option. Bonds are normally offered by the government, local government units (LGUs), and public and private organizations, and are sold via banks and financial institutions.

The good thing about bonds is that the bond issuer is contractually obligated to indicate how much s/he needs to pay the investor after an indicated period of time, regardless of its performance. Unlike investing in the stock market, which can be both risky and time-consuming, investing in bonds can preserve the face value of the investment, while delivering earnings through interest rates.

However, to fully realize its income generation potential, an investor must consider items such as the types of bonds to invest in, the tenor or length of time for the investment to mature, and the corresponding interest earnings.

Mutual Funds

These are available for a broad range of asset classes, and allows investors to invest in both stocks and bonds that are expertly researched and chosen by professional fund managers.

Exchange-traded Funds

Exchange-traded funds, or ETFs, are a suitable alternative to mutual fund investment. Though similar to mutual funds, they represent a large basket of stocks that are grouped by sector, country, and capitalization, among other factors.

A portfolio’s equity portion may be divided among various industrial sectors, enterprises of different market capitalizations, domestic stocks, and foreign stocks. The bond portion may be allocated between short-term and long-term, as well as government and corporate debt. ETFs are also very beneficial in creating a well-rounded portfolio as they cover a wider range of asset classes.

However, these are not actively managed, and may offer more savings over mutual funds while providing portfolio diversification.

Taking Care of the Portfolio

After the investment portfolio has been established, the investor then needs to constantly analyze and rebalance it, because price movements vary and may cause initial weightings to change. To assess the asset allocation, the investments, together with their corresponding value, need to be regularly reviewed, to assess how they are contributing to the overall investment portfolio.

Other factors also vary over time, such as the investor’s financial situation, goals, and risk tolerance. If any of these changes, then the portfolio also needs to be adjusted.

The portfolio needs to be rebalanced if there are positions that are overweight or underweight, while maintaining diversification within each class.

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