Your financial portfolio should be as personalized as your DNA

Jonathan Clements
Director of Financial Education
cpi@creativeplanning.com
Creative Planning’s Director of Financial Education, Jonathan Clements, tells you why it is important to take your entire situation into consideration when designing an investment portfolio.

This is Jonathan Clements, director of financial education for Creative Planning.

The global financial markets consist of four sectors, roughly equal in size: U.S. stocks, U.S. bonds, foreign stocks and foreign bonds. This is the portfolio that all of us collectively own so it’s a logical starting point when we design a portfolio.

But how should you take this portfolio and customize it to your own individual situation?

A lot of financial advisors focus on things like time horizon and personal tolerance for risk, and those are certainly important. But to truly customize a portfolio to your individual situation you need to consider a host of other factors.

For instance, let’s say you get a lot of income from things like your paycheck or rental properties or defying benefit pension plan. You have less need for an investment income, so as a consequence you can probably hold less bonds in your portfolio.

Or imagine you just got involved in a technology startup. Not only are you taking a lot of risk with your so-called human capital (your income earning ability), but also, you’re making a big bet on the technology sector. To tweak your portfolio to reflect those bets, you might want to hold more bonds in your portfolio or reducing your exposure to technology stocks just in case there’s a downturn in the tech sector and you find yourself out of work.

Or imagine you’re retired and you’re living off your portfolio. Because you’re living off your portfolio, you probably want a fair amount of bonds and other conservative investments. You probably want to focus largely, or entirely, on U.S. bonds and hold few, if any, foreign bonds so you don’t have that currency risk in there which could mean sharp, short-term losses.

Finally, as we adapt our portfolio to our own individual situation we should think about taxes. Let’s say you hold a lot of shares of your old employer and you’re looking to unload that position because it is so risky, but you don’t want to sell it too quickly because you don’t want a big tax hit in a single year. To minimize the risk in the rest of your portfolio while you gradually unload that big position, you might look to re-juice holdings of similar companies in your portfolio so that your portfolio remains more balanced.

This is Jonathan Clements for Creative Planning.