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How To Build A Strong Financial Portfolio

Every person has a tentative goal that helps him achieve a particular level of financial stability in life. This goal could be to prepare for an early retirement, to make provisions for a person’s family or even to maintain a healthy amount of cash flow enabling a person to acquire greater buying power. This collection of financial assets, liquid or non-liquid, to plan for one’s immediate and future needs is called a Financial Portfolio. In simpler words, it is a term denoting a collection of all the different types of investments a person has made.

The Need for Financial Planning

Every goal can be achieved with a proper plan. The same is true for financial goals as well. If anyone wants to buy a new car or a bigger house in the future, they need to start saving up for it from today. But merely saving from one’s current income might take too long. Therefore, it is important to make the correct type of investments to be able to achieve certain financial goals faster. Before a person begins planning for future, he first needs to assess his current financial status by taking in account all current investments and liabilities. After a clear understanding of the current status, one can then start planning for the future.

Investing in stocks, bonds and other easily liquefiable assets is as important as maintaining a few non-liquid assets like real estate and other such fixed appreciable assets. The correct management of funds can yield significantly higher returns when compared to a poorly managed portfolio. This also helps a person save up for any unexpected life event like a medical emergency of a family member or losing a stable job. A healthy portfolio guards against future loss and paves the way to achieve long-term goals. It is the best indicator of financial stability and should be a crucial part of every person’s life.

To understand which investments will yield greater profits than others, a careful process has to be planned after studying current market trends, inflation rates and any other factors that could influence a person’s choice of investments.

Consulting an Advisor

Financial planning can be an extremely complicated and time-consuming affair for those who are not well versed with all the current market trends. In this case, it is advisable to consult a Financial Planner or Advisor. These professionals are experts in their fields and it is their job to help a person build a satisfactory portfolio. Advisors are well versed with current market influencing elements like inflation rates and keep track of crucial market changes to help a person make more informed decisions.

Inflation and how it affects one’s portfolio

Inflation can be defined as an increase in the price level of goods and services in an economy over a period of time. A rise in general price level results in a lesser value for each individual unit of currency. When the inflation is high, people with fixed income investments are hit the hardest. This happens because the value of the fixed interest income becomes lower per unit as goods or services are now worth more than what they were when the profit percentage was fixed. Since inflation can also lead to people buying less, sometimes they are an indication of an imminent drop in prices as the ultimate goal of any market is to sell and make a profit. All this information can be used to one’s advantage to make better financial decisions, and thus a better portfolio.

Insurance and how it protects against unexpected life events

Insurance can also be considered as a form of surety against unexpected loss. This loss can occur with regard to human life or ownership of assets and property. Unforeseen circumstances can occur at any time and adding insurance to anyone’s list of investments is a great way to strengthen a person’s portfolio and reduce the overall risk.

Types of Investments and their impact on one’s Portfolio –

All investments can theoretically be broken down into two major categories – Fixed and Liquid Investments.

Fixed Assets – Fixed Assets are those assets whose growth occurs over a relatively longer period of time. They are usually not easily liquefiable and require an investor to be relatively more patient. Fixed Assets also have a reduced level of immediate risk, since an investor does not expect returns soon.

The best examples of Fixed Assets are Real Estate Investments. These can include anything from undeveloped land, houses, condominiums, townhomes, and office buildings to retail store buildings and factories. People who invest in buying land expect the prices to increase in the future, often over many years. Land is a relatively more continuously appreciating commodity than others, although price drops due to lack of demand are common as well. A smart investor can make a huge profit over investing in real estate, greatly adding to his overall portfolio steadily over many years.

Liquid Assets – Liquid assets, like the name suggests are assets that can be converted into cash quickly, with minimal impact to the price received. Total savings in cash are also considered as liquid assets. Short Term securities, checking and savings accounts, stocks and even short-term bonds are liquid assets as well. Foreign Exchange markets are usually considered the most liquid asset in the current global business scenario.

Gold is also a very popular liquid investment option, especially in India. There are two important reasons why investing in gold is a good option. Primarily, it can act as a hedge against inflation. Over a period of time the return of gold investment is in line with the rate of inflation. The second major reason gold is usually a smart investment option is because gold is negatively correlated to equity investments. For example if the equity markets are performing poorly and Gold performs well, having gold in a person’s portfolio mix will help reduce the overall volatility of the portfolio. Thus it reduces the risk and can act as a mode of stability in a fluctuating market.

A properly managed portfolio must be in tune with a person’s risk appetite – whether risk averse or risk-happy. If one wants to be on the safer side and does not mind a lower return on investment, the portfolio must reflect that personality in the way it is managed and the percentage that is allocated to long and short-term investments.

People spend most of their life accumulating money and making investments but often tend to neglect the most crucial part of planning for the future. A good portfolio takes into account all factors that can influence a person’s finances, and designs a system that strikes the perfect balance between reserving money for unexpected circumstances and making sure new income is generated by continuously looking for fresh opportunities to invest in.

 

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