Earning a lot of money is not the key to prosperity. How you handle it is.
— Dave Ramsey
The everchanging bear and bull markets call for different asset allocations for investors, which should be as unique as them. It may seem tricky and intimidating, but crafting a well-balanced investment portfolio of around 15% of your pretax income is not rocket science. Yet it’s complicated if finance is not your forte, plus there are many moving targets to monitor for proper investment balancing.
That’s why it helps to find credible investment management in San Antonio, TX, to make allocating your assets a positive process and experience. No matter how involved you want to be with your investment portfolio, your Texas financial advisor will work diligently to help you meet your financial goals. It will be to your highest advantage to work with a fiduciary financial advisor who upholds your best interests ahead of their own.
Your financial plan should be adaptable and agile, as course corrections will need to shift as your life and the economy changes. Discuss this with PAX wealth advisors.
In order to create a portfolio you feel good about, you must first determine what assets are right for you based on your risk tolerance and time horizon, then consider diversification and tax considerations, as explained in this article.
What Is An Investment Portfolio And What Are Its Components?
Where you put your money matters, as each location/asset will determine its preservation and potential growth over time. That’s why a diverse investment portfolio matters. Rather than a tangible portfolio, the term investment portfolio refers to the idea that your assets exist under one umbrella.
An investment portfolio is a collection of various assets, which usually include bonds, stocks, exchange-traded funds (ETFs), and mutual funds. Asset allocation refers to the percentage of each which determines your investment risk. For example, a 100% cash allocation offers the lowest risk while a 100% stock allocation is the highest risk.
An asset is anything that provides potential value now and in the future. Different types of assets can co-exist under your umbrella, including cash, commodities like gold, cash equivalents, closed-end funds, art, real estate, alternative investments, and much more.
For example, if you have an individual retirement account, a taxable brokerage account, and a 401(k), you should consider those accounts collectively when deciding how to invest them.
How To Determine Your Risk Tolerance
Your risk tolerance is just as it sounds—your ability to tolerate risk mentally, emotionally, and financially. It’s based on how well you accept investment losses in exchange for the possibility of earning higher returns on investments. Your risk tolerance is connected to how you mentally cope with the ups and downs of the market.
Risk tolerance is also tied to your time horizon: the amount of time until you you reach your financial goals, like saving for a child’s college fund. If your goal is many years away, like retirement, you have more time on your side to navigate highs and lows, which allows you to benefit as the market trends upward.
An aggressive portfolio is best for an investor with high risk tolerance and a long time horizon. A conservative portfolio is ideal for an investor with low risk tolerance and a short time horizon.
Diversification And Asset Allocation
Diversification refers to the spreading of your assets across a variety of asset classes within your allocation buckets to help reduce risk. By picking the right group of investments, you can reduce the fluctuations of investment returns without sacrificing too much potential gain and limit your losses. Asset allocation is vital because it impacts the likelihood of meeting your financial goals.
If your portfolio does not contain enough risk, your investments may not reap the returns needed to reach those goals. For example, if you’re saving to move in retirement (long-term goal), it will help to allocate funds toward a stock or stock mutual funds. However, if you create too much portfolio risk, the funds needed for your goal may not be available when you need it.
If you’re saving for a short-term goal, like paying for a wedding next year, a portfolio weighted in stocks would be inappropriate. Do you see how the time horizon helps determine what kinds of assets you choose to invest in?
For instance, given your financial goals, age, and risk tolerance, perhaps a 60/30/10 allocation is correct for you. This refers to 60% in stock, 30% in bonds, and 10% in cash. However, your portfolio lacks diversification if your stock allocation is invested in large cap U.S. tech stocks like Microsoft, GE, and Exxon Mobile without exposure to other sectors like energy, consumer cyclicals, financials, and small caps.
Regardless of your asset allocation, the more diversified your portfolio (less volatile and more predictable your returns), the better off you are. If you need a second opinion on your portfolio diversification, ask for an updated risk tolerance test.
The Benefits Of Rebalancing Your Portfolio
It’s common for asset allocation to teeter off balance along with the market. Let’s say one of your stocks does well and rises in value; this can disrupt your portfolio proportions. By rebalancing your portfolio, you can restore your investment portfolio to more preferred allocations.
Of course, some investments rebalance themselves like target-date mutual funds. However, we recommend rebalancing when one of your asset classes shifts by more than a predetermined percentage, like 5%, or every six or 12 months. As for our example, if your 60% in stocks increases to 65%, you can sell some stocks or invest in other asset classes to bring your stock allocation back down to 60% and your preferred asset allocation mix.
Before rebalancing your portfolio, consider whether the rebalancing method you decide on will trigger tax consequences or transaction fees.
Tax Considerations For Investment Portfolios
Because everyone must pay taxes on income, this does not exclude investments, as they are still sources of revenue. To avoid significantly reducing your investment returns which can potentially jeopardize your financial goals, you must consider the impact of taxes before making investment changes.
It’s highly recommended to work with your Texas investment advisory firm before making any decisions that could impact your tax bill.
Discuss these tax efficiency strategies with your financial advisor based on your holdings:
- Diversify your account types
- Contribute to tax-efficient accounts
- Select tax-efficient investments
- Harvest losses to offset gains
- Match investments with the proper account type
- Hold investments longer
*Biblically Responsible Investing (“BRI”), Values Based Investing (“VBI”) involves, among other things, screening for companies that fit within the goal of investing in companies aligned with your values, whether they are religious or secular. Such screens may serve to reduce the pool of companies considered for investment. Investing involves risk. BRI and VBI investing do not guarantee a favorable investment outcome.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate.
Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.
This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.