Building a Strong Financial Portfolio: A Step-by-Step Guide

If you have invested any of your money in financial instruments like stocks and bonds, then you own a financial portfolio.

The following are steps you can take to further build and refine your financial portfolio.

What is a Financial Portfolio?

First, let’s start with a simple definition. A financial portfolio is a bundle of financial assets owned by an individual investor. These assets may include common stocks, corporate and government bonds, cash and cash equivalents, and alternative assets.

All of these different types of assets are known as asset classes. Your financial portfolio should contain the right mix of assets from various classes based on your investing goals, timeframe, and level of risk tolerance. The process of building this type of financial portfolio is known as diversification.

The idea here is to spread your investment dollars out among a broad group of securities in the main asset classes. This can help lower overall risk when compared to concentrating most or all of your money in a single asset class like stocks — because when one asset class falls in value, the others may rise, and vice versa.

Read More: Beginner’s Guide to Portfolio Diversification

Which Assets Are Included in a Financial Portfolio?

Most financial portfolios contain a mix of the following types of assets:

• Stocks — Also known as equities, these are ownership shares of publicly traded companies. You make money on your stock investments when your shares rise in value over time and you sell them for more money than you paid for them. Some companies also pay out a portion of their profits to shareholders in dividends.
• Bonds — These essentially represent loans that you make to the bond issuer, which is either a government entity or a corporation. Bonds mature on a fixed date in the future and pay a fixed rate of interest. Higher-rated bonds carry lower risk but also pay lower rates of interest, while lower rated bonds are riskier but pay higher interest rates. The risk is that the bondholder will fail to repay the bond principal and interest on time.
• Cash equivalents — These are the safest and least-risky, but also lowest-yielding, asset class. They consist mainly of bank savings and money market accounts and certificates of deposit (CDs).
• Alternative assets — This is a loose term that describes any type of asset that falls outside of the main asset categories of stocks, bonds and cash. Alternative assets include real estate, commodities, precious metals, collectables, private equity, hedge funds, financial derivatives and cryptocurrencies, to name a few.

Note that most of these assets can be purchased via mutual funds and exchange traded funds (ETFs). These are bundles of certain types of investments (like stocks or bonds) owned by many individual investors. Purchasing shares of a mutual fund or ETF offers instant diversification since your shares give you ownership of a wide range of different securities of a certain type.

Types of Financial Portfolios and How to Build Yours

There are as many different types of financial portfolios as there are investors. The type of financial portfolio that’s right for you will depend on your investing goals, timeframe and risk tolerance.

If you’re investing for retirement, for example, and have a long-term timeframe (i.e., you’re relatively young) and a high level of risk tolerance, you might want to build a more aggressive financial portfolio that contains a relatively high percentage of stocks and low percentage of bonds and cash. This could enable you to maximize your portfolio returns over the long term, since you’ll have time to ride out short-term bouts of market volatility.

Conversely, if you are nearing your planned retirement date and have a low level of risk tolerance, you might want to be more conservative when building your financial portfolio. In this scenario, you have a much shorter investing timeframe and less time to ride out short-term volatility. Here, your financial portfolio should probably include a lower percentage of stocks and a higher percentage of bonds and cash.

Read More: Breaking Down the Average Portfolio Mix by Investor Age

Next Steps for You

Personal Capital can help you build a financial portfolio that’s right for you based on your particular circumstances.

With our Investment Checkup tool, you can monitor the performance of your portfolio holdings, assess your level of risk tolerance, view a target asset allocation based on your risk and investing time horizon, and compare your current portfolio allocation to your ideal target allocation.

The Personal Capital Dashboard is another helpful tool for building and maintaining a financial portfolio. It gives you a 360-degree view of your assets and lets you go deeper into your investments with sophisticated planning and analytics tools. And the Personal Capital Retirement Planner can help you stay on track for retirement success by making financial portfolio projections based on your risk tolerance, long-term goals, spending habits and more.

Get Started with Personal Capital’s Free Financial Tools