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Your financial portfolio should be as personalized as your DNA

Creative Planning’s Director of Financial Education, 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 start up. 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.

Jonathan Clements is Director of Financial Education for Creative Planning, where he also sits on the advisory board and investment committee. Born in London and educated at Cambridge University, Jonathan spent almost 20 years at The Wall Street Journal, where he was the newspaper's personal finance columnist. He's the editor of and has written seven books, including his latest, How to Think About Money.
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Creative Planning is featured by Barron’s as the #1 Independent Wealth Management Firm in America by Barron’s (2017). Creative Planning and its President and Chief Investment Officer, Peter Mallouk, are the only firm in history to be recognized by Barron's as their "#1 Independent Advisor in America" for three consecutive years (2013-2015). Creative Planning has also been named as the "#1 Wealth Management Firm in America" by CNBC on the only two rankings the network every released (2014-2015).

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