An efficient financial portfolio provides you with the best combination of risk and return to meet your personal goals. Your portfolio should also take into account your need to access funds and strategies to minimize your tax burden. If you have money to risk, you can be more aggressive with the balance of financial instruments in your portfolio. If you won’t need your money for a while and are simply looking to protect what you have, you might choose more conservative offerings. Whatever your goals, use a variety of measurements and tools to create the most efficient portfolio.
1. Set a goal for an annual return on your investments before you begin choosing individual stocks, bonds or other financial instruments. During widespread market upheavals, many people are lucky to keep their losses to a minimum, hoping to ride out the storm and have the value of their portfolio come back later. You may be interested in a modest return that helps grow your money of over the long term, or you may want to be more aggressive in growing your net worth.
2. Meet with a financial planner who knows industry trends and benchmarks and can help you set realistic goals. If you are new to managing your money, you may not know how to set a realistic return number on your investments, choose the right mix of instruments, or be able to determine conservative choices from aggressive ones.
3. Determine your acceptable risk. Never gamble money you don’t have or can’t afford to lose. Look at your worst-case scenarios and determine how much of your portfolio you could afford to lose if an investment goes bad. Some investments — such as government bonds, certain insurance policies and bank-issued certificates of deposit — are risk-free, providing a low return. Others, such as stocks, can double in value during the course of a year but may also lose that much in value.
4. Create your portfolio mix — only after you determine your acceptable level of risk — of investments in higher-risk instruments with the amount of money you have to “gamble” and in lower-risk or risk-free instruments with the money you need to protect.
5. Determine your liquidity needs. Put some of your money into assets that let you sell or borrow without penalty if you need to access your funds during the year or may need to use them during the coming years. Withdrawing funds from retirement instruments, such as a 401(k) or IRA, for example, will result in a penalty. Some mutual funds charge you a fee each time you make a sale or buy stock. Analyze your cash flow needs as you create your portfolio to ensure you pay the least amount of fees, penalties or other costs when you need to access your funds.
6. Invest in tax-free or tax-deferred financial instruments if you don’t need to access your money during the near future and you are more interested in protecting than growing your money. Contributions to a 401(k) not only give you a tax-deduction on contributions and tax deferment on the growth of those funds, but they may also provide you with a matching contribution from your employer.
7. Set a tax strategy. Construct your portfolio to minimize your tax burden each year. Depending on the type of investment that earns you a profit each year, you may pay more in capital gains taxes. Profits on gold and silver for example, are taxable at a higher than stocks.
Items you will need
- List of current assets
- Paper and pencil
- Access to the Internet or a financial adviser
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