Portfolio Balancing Part 2 – Making The Best Use of Asset Classes

In the first article, we discussed what the four main elements of your personal investment portfolio will generally consist of. With that understanding in mind, let’s continue on to discuss how each of these asset classes is practically applied towards building our financial futures.

Cash and Money Instruments

Your cash-instruments are used to pay the bills. They don’t generate enough returns, and there’s no real capital returns to speak of with these securities. Think of this category as your bridge between an income-generating security and your bill-payments. The cash instruments provide enough liquidity for you to gradually free up income-generating assets as the opportunities arise, and then let you cash-out and make payments with the least amount of fees or losses associated with early redemption.

Fixed-Income Securities

This category is my personal favourite. Your fixed-income securities are your ‘lifestyle-facilitators’. They generate the cash-flow that pays your bills, hedges your mortgage, and buys your daily cup of coffee. Because of the predictability and reliability of the income you’ll receive from this category, you can think of it as being responsible for your monthly allowance. Use this income to pay your phone bill, your utilities, your rent, and maybe even buy that cup of coffee that starts off the day.

Through proper planning and banking, this category can greatly reduce your monthly-stress levels by automatically paying your living expenses, so that all you need to do is worry about the aspects of your personal life that matter most. By directing payments from fixed-income securities to your money-instrument category, you can set up a buffer amount that keeps you several days ahead of your payments, and therefore keep you in control of your bills. For more information on how this works, look up strategies such as ‘Laddering’ in our glossary section.

Equity Securities

With modern advances in financial planning, the average investor no longer needs access to huge amounts of capital to build a personalized and diversified equity portfolio. This is the section of your portfolio that will generate the majority of your extra-returns that go towards improving your lifestyle, building a retirement portfolio, and supporting your long-term plans. While returns from this category are always risky (as the stock market tends to be) the long-term performance of carefully selected assets, combined with associated common dividends, will usually be what decides if your portfolio into the green numbers at the end of your investing horizon.

A clever advisor can help you to select a series of mutual funds that best represent your investing requirements. This saves you time, money, and effort in the way that you are benefiting from the economies of scale associated with the mutual fund, while also benefitting from the simplified reporting of a professional management group that will be looking after your fund. It’s like getting a third opinion on your list of stocks, because each and every equity held within the portfolio is carefully being scrutinized by the fund’s own manager, as well as your investment advisor, and finally, yourself.

Many investors see their house as a long-term investment. Even while considering the housing crash of 2009, real-estate investments have proven to be very practical as a long-term holding. As such, investment advisor will generally keep track of the value of their client’s residence, while creating strategies that help to manage the maintenance and tax costs associated.

While increases in your home’s value shouldn’t necessarily be relied upon for retirement, planning minor renovations to mitigate taxes, and taking care of your investment in your home will pay great dividends in supporting its future value. Talk to your advisor about how timing your home maintenance can make the world of difference in your tax payments. Think of as the government empowering you to build the value of your home through tax breaks.

Now that we understand both what assets are in our portfolio, and how each class is used to support our lifestyles, we can begin to look at how a strong personal investment portfolio can be structured to best take advantage of the benefits of these classes, while presenting the least amount of risk to our long-term goals.

Next: Portfolio Balancing Part 3 – What Should Your Portfolio Look Like?