How to Design Your Portfolio?

Introduction

Your ability to design a portfolio that best suits your financial needs has a central importance in personal finance. While smart capital allocation is the process or the framework, portfolio is the product or the outcome.

The process of designing your portfolio is also a balancing act where you accommodate different variables and reconcile various divergences. However, the central theme of capital allocation and portfolio construction should be to outline some realistic and achievable financial goals first and then have a simple and workable plan to achieve those with the available resources in a given timeframe.

In this blog post, I will discuss the process of designing a financial portfolio, in detail, and will also offer some guidelines in the form of DOs and DON’Ts, in the end.

Factors to be Considered

There can be many correct ways of designing your portfolio as there are so many factors affecting your choices. Let’s first list down all the possible factors:

The most important factor is your temprament, your priorities in life, the world view and what you expect the money to do for you and your family.
At what stage you are in life and professional or business career.
The financial resources available to you and the financial goals you want to achieve.
Your personal health and the detail of your family members and dependents.
Your interest in personal financial matters. Do you want to spend time on your portfolio or you have other pressing commitments.
The general business and financial environment around you and how developed and regualted the markets are.

Some Variables Affecting Your Choices

Depending upon the factors mentioned above, the interplay of some variables will make every individual’s situation unique. Hence, every portfolio is different. An apple-to-orange comparison will not be appropriate. Every person is most suited to design his/ her own portfolio. However, some principles may have wider applicability. Few variables and how they might affect your choices are listed here:

A 25 years old’s portfolio may look very different from that of a 50 years old.
How you perceive risk, is an important building block of your portfolio.
Whether you want to chase growth, pursue value, want stability or prefer simplicity. You may also want to speculate.
Whether you have inherited wealth from your parents or you are a self-made person.
Are you the sole breadwinner of your family or your spouse and other family members are also earning.
If you started a family late and have younger children than what is normal at your age, your portfolio may reflect it.

Available Investment Options

There is a wide variety of investment options to choose from. Some of these are as under:

Real Estate. Commercial, residential and agricultural.
Equity. Direct equity (public and private), equity mutual funds, index funds and some other variants.
Debt. Bank fixed deposits, savings accounts, debt mutual funds, bonds etc.
Precious Metals. Gold, silver and others.
Forex, commodities, cryptocurrencies, NFTs etc.

A Suggested Process of Desinging and Tweaking Your Portfolio

Keeping in view the above-mentioned factors and variables and maybe some others that are applicable to your peculiar situation, you can start working on your portfolio. A suggested sequence of actions or the way to go about it is explained below:

It is better to jot down everything in a notebook that your are not going to lose. You may also use a cloud-based note-taking mobile app for this purpose. While doing so, give a brief reason for whatever you decide to do. This will help you analyze later, how your thinking has evolved over the years.
List down all your financial resources. This should include all your assets like real estate, equities, cash, gold, bonds, and also your salary, pension and any other regular income.
Then define your finacial goals, in writing. In doing so, be as specific as possible. For example, I want to get rich or I want to make a lot of money cannot be your financial goals. Instead, learn to set SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) goals. This will keep you focused and will let you measure your progress as well.
You should arrange for regular income first which should cater to your recurring needs. For this purpose, your pay, pension and any other regular income source is very useful.
After getting your daily and monthly needs out of the way, you should get down to the wealth creation part of your portfolio. At different stages of your life, your portfolio may look different. Re-balancing, if considered necessary, should be undertaken once a year, prefereably at the close of financial or calender year.
How you should approach and handle your portfolio at various stages of your life is discussed in the succeeding paras.
In 20s or at the Start of Your Professional Life. This is the time when you start building your portfolio, if your parents have not started it earlier for you. In case they have, you take it on from there. It may look, predominantly, growth oriented at this stage. You can make some bold and aggressive, but well considrered moves since your are just starting and have no dependents yets. You cannot make any investments in real estate as you don’t have large sums. You don’t need to invest in debt either. At this stage, you may either start an SIP (systematic investment plan) in 2-3 different equity mutual funds or start buying equities directly. You may go on, with periodic tweaking, till your early 30s.
From Early 30s to Early 50s. This is the most crucial part of your prefessional and financial life. During this time, you start a family and your financial needs also grow significantly. You start having clarity about your financial goals. Your exposure to financail products increases and you may like to make some changes in your portfolio. You may add your first real estate product in your portfolio. The suggested re-balancing which can be undertaken during this period is that you may slow down your pursuit of growth a bit and start adding some stable dividend paying stocks in your equity portfolio. You may like to divert some funds to debt with a purpose to add stability to your income and also to insulate your portfolio from the market volatility to the extent of your financial goals that are now approaching. While you turn 50, you may start prefereing simplicity vis-a-vis complexity in your portfolio alongside stability, as you start having early thoughts about your retirement.
From Early 50s to Mid 60s. You achieve your major financial goals during this period and then retire at around 65-70 years of age depending upon your health and some other factors. By now, you have your own house, all your kids are married and doing well in their life. During this period, you continue to simplify your portfolio through re-balancing. Probably, you prefer index funds and some mutual funds now over direct equity. You may also like to restrict your portfolio to below 10 items rather than having 30-40 or even more of them. You now like debt more that equity and you prefer simplicity and stability over anything else. While 20s, 30s upto mid 40s was the wealth accumulation phase, and from mid 40s to your retirement was the wealth preservatin phase, this is the start of your wealth deculmulation phase.
Retired Life. If you have planned correctly and luck is also on your side, you have sufficient financial resources to fund your retirement that may go upto 90 or even 100 years. Your spouse is also your responsibility, if she has not been working for money. Although your life style expenses drop significantly during this time, your health related expenses may go up. You like those financial products now that give you hassle free, regular income. You don’t have the stomach for complexity anymore and you prefer fixed income funds, stable businesses that pay regular dividends, index funds or some equity mutual funds having good track record. You don’t want to experiment anymore.
As you have observed, during the early part of life, growth is the halmark of your portfolio, you are ready to experiment and ready to take calcualted risks. In the middle age, you start preferring stability and regular income and the focus shifts from wealth accumulation to wealth preservation. During your retired life, however, you like a simple portfolio guaranteeing stable income and you are averse to experimentation.

Some DOs and DON’Ts

Although all relevant details of the subject have been covered briefly, it seems appropriate to add a list of DOs and DON’Ts here, with regard to designing your portfolio:

Have clear financial goals. Vagueness is counterproductive.
Keep your portfolio simple, especially as you grow in age.
While analyzing various financial products for investments, don’t chase performance. See their suitability.
Always make a distinction between risk and volatility. Mitigate risk as much as possible and learn to live with volatility. Don’t make volatility a cornerstone of your investment strategy.
Remain intimately involved in designing your portfolio. Seek professional advice, if you need it, but have full control on your financial decision-making. This is one of the last things to delegate.
No one can design your financial portfolio but you. Learn to interpret the advice you get according to your situation. Every portfolio has to be different because every situation is unique.
Always take lot of time before making a major financial decision. Never do it in a hurry.
Don’t follow someone who is a lot richer than you. May be he can afford a lot more risk than you.

Conclusion

Designing your portfolio is fundamental to the attainment of your financial goals. Since every individual has a unique financial situation, every portfolio must be different. As you grow in age and in your working life, your portfolio should also change according to the situation. The suitability of various investment options must be correctly assessed and matched with your peculiar needs before adopting them. Portfolio re-balancing should be used to address the changing financial realities.

How did you find this content? Please comment and give suggestions, if you have any.

My other articles you may find useful are:

How to Make a Personal Financial Plan – Basic Considerations

Personal Finance – A Suggested Checklist

Investment vs Speculation

A Brief History of Money

Why I Started a Blog on Personal Finance

Anatomy of Financial Risk

Debt, Equity, and Real Estate: An Overview

Retirement Planning

How to Compare Equity and Real Estate as Investment Options

How Stock Market Works and How to Work in Stock Market?