Portfolio Balancing Part 1 – What’s in Your Portfolio?

There are many essential factors to generating returns in your personal investments portfolio. Over the course of this periodical, we’ll be describing how you can learn simple strategies for getting the best results through all of them. This week will have a three-part series that examines how to structure your personal portfolio like a pro.

Your personal portfolio consists of four major investment components:

Cash and Money Instruments

These are your most liquid assets. Anything that has an extremely low risk, and can be cashed out immediately with little-to-no detriment is considered to be (as good as) cash in the financial world. This includes your money-market funds, cash, savings funds, and cashable notes. It is important to note that Commercial Backed Paper (such as a Mortgage-Backed Security) should not be considered a part of this category. Even though these investments can be of extremely high quality under the right circumstances, the risk of a personal default is high enough to bump these securities into the fixed-income category.

Fixed Income Securities

These are your bonds and your preferred shares. Any asset that provides a reasonable assurance of a regular income (thus being a security that acts as debt) fits into this category. The reliability of this category is its defining category. Common shares with a regular dividend don’t fit into this category because there is always a chance that it would get paid out, or that it could be deferred to another date. Preferred shares and bonds usually have a stronger contractual requirement associated with them to ensure that you get your income

Equity Securities

These are your stocks, mutual funds, and derivatives. This is the section of your portfolio where your main amount of capital gains will be generated from.

By carefully diversifying throughout 32 different selections, you can effectively neutralize a great deal of the market-risk associated with your holdings. This sort of diversification is what you’re really paying your advisor for, as it is what creates the overall security of your portfolio. An informed advisor can help you to choose exactly which companies, and through which vehicles to invest in these companies, are best suited to meet your needs.

Physical Assets

The average investor’s major physical asset investments consist of their house, and maybe their car. Any physical asset you own that is relevant enough to a bank to act as collateral can be considered to be an investment in a physical asset. While many investors manage this category separately from their main investment portfolio, it is important to keep the changing values of these assets in mind, if nothing else for tax and debt-planning reasons.

This list describes the main inputs that are going into your personal portfolio. The next article will plain how the professionals use each of these structures to meet your investing goals.

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