What is a Financial Portfolio?
A financial portfolio is an umbrella term that encompasses your savings, investing and retirement strategies.
January 25, 2022
When you hear people talk about their investments or retirement strategy, they may throw around the term financial portfolio. If you’re planning for your financial future, you might be wondering, “What is a financial portfolio?”
Simply put, your financial portfolio is the collection of financial accounts and assets you have. Think of it as a bucket of different savings vehicles for different types of financial goals, both short-term, like stocking an emergency fund, and long-term, like investing for retirement.
Usually, a financial portfolio consists of stocks, bonds and cash, but it can also include “alternative” investments like real estate or collectibles.
These different assets are called “asset classes.” The three primary classes are:
The goal is to have a mix so you have assets that don’t lose value during a stock market downturn and higher-return investments like stocks that grow faster than the rate of inflation.
For many people, the goal of investing is to create long-term wealth for their retirement years and possibly to leave a legacy. But people invest and save for a variety of goals.
What does a typical financial portfolio contain?
A financial portfolio example might include accounts like the following:
IRA accounts such as a Roth, Traditional, SEP or SIMPLE
Alternative investment such as real estate
A portfolio’s diversity depends on your risk tolerance, age, and financial plans. Younger investors typically put retirement investments in more aggressive funds to facilitate growth, while older investors’ portfolios include some balance of conservative and aggressive.
How do you use your financial portfolio?
Different kinds of accounts allow you to access money at different times. Besides retirement, you might also be saving for a down payment on a house or your baby’s college. Let’s break down some of the accounts and how you might use them.
These employer-based retirement accounts are designed not to be touched for decades. If your employer offers matching funds (many do), you’re wise to contribute enough to get the match.
Say your employer matches 6% of your gross salary — then contribute at least 6%, so you don’t leave free money on the table. Even if your employer doesn’t match, having money taken out of your paycheck before it hits your bank account is one of the least painful ways to save for retirement.
Whether or not you contribute the annual maximum ($20,500 in 2022) depends on your income and other financial goals. Different accounts offer better flexibility, but retirement plans prevent you from touching the money early.
Individual Retirement Account (IRA)
These retirement accounts, either Traditional or Roth, have low annual contribution limits — $6,000 if under 50 and $7,000 for 50+ — but the returns add up if you start when you’re young.
A Roth IRA has the advantage of not being taxed in retirement because you make after-tax contributions. In contrast, a Traditional IRA’s pre-tax contributions mean paying taxes on distributions in retirement.
Brokerage account (or taxable investment account)
A brokerage account is another way to invest in the stock market. The main difference is that a taxable account offers more flexibility, with no cap on contributions or set age for withdrawing funds.
Mutual funds and exchange-traded funds (ETFs) are groups of stocks and bonds that, by design, diversify your account. Because they’re less volatile, they offer safer returns. Cryptocurrency has also become more prominent in recent years as a way to diversify, but it generally carries with it a high risk.
To open a brokerage account, you need to invest through a brokerage firm, either full-service or online, and you may need to save up to meet the minimum investment threshold — these vary. There are:
Full-service firms with financial advisors who offer personalized advice
Discount firms that provide an online DIY approach
Robo-advisors offer online investing that relies on automation and algorithms to manage your money with little involvement on your part
Brokerage fees and commissions vary significantly, depending on the services offered, so explore what works for you.
Certificates of deposit (CD) accounts
A CD account is a savings account available through banks or credit unions that offers a better interest rate than a regular savings account. It requires you to lock up your money for a specific timeframe, anywhere from 3 months to 5 years. Generally, the longer the term, the more favorable the interest rate, usually fixed.
A CD requires a minimum lump sum deposit and typically doesn’t allow regular contributions, so you must have a chunk of money saved to put away. It’s a good vehicle to protect dedicated savings for a shorter-term goal like a down payment because it’s FDIC-insured and isn’t subject to the stock market’s volatility as with a brokerage account.
Money market account
Also available through banks and credit unions, a money market account is another type of FDIC-insured account that allows you to save money for a shorter-term goal and earn a better interest rate than a regular savings account. It’s more flexible than a CD account in that you’re not required to lock up your money for a specific term. You can also add to it, and you’re allowed to take money out (limited to six transactions per month). Like a CD, it will require a minimum deposit, possibly $1,000 or more.
A savings account at your financial institution offers the most flexibility for access to ready cash. It doesn’t earn much in interest (the national average is 0.06% APY), but it’s the best type of account for saving something like an emergency fund that you can access immediately, like for an unexpected roof repair.
There’s another asset class, alternative investments, that doesn’t fall under the “stock, bond and cash” category. These assets typically aren’t publicly traded. They’re also not easy to liquidate and can be risky. Real estate is the most well-known, but other alternatives include collectibles, commodities, venture capital and private equity.
A financial portfolio is an umbrella term that encompasses your savings, investing and retirement strategies. Made up of different accounts, the holdings of a financial portfolio will vary from person to person based on their strategy, risk tolerance and even age. No matter what it looks like, a financial portfolio is a helpful tool in the journey towards financial freedom.
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