Investing your hard-earned money can be intimidating. With a wealth of options available, it can be hard to decide where to begin. Understanding the basics and knowing how to customize an investment portfolio are key to making investments that will help you achieve your financial goals in the long run.
We'll walk you through how to create a custom portfolio of investments that's tailored specifically to your needs and objectives – giving you more control over where and how you place your money.
What Is a Custom Portfolio?
A custom portfolio is a collection of investments that you design and tailor specifically to your needs and goals. It takes into account your risk tolerance, time horizon and financial objectives to create your unique strategy for building wealth. While it's possible to invest in pre-made portfolios or index funds, creating a custom portfolio allows you to be more selective with your investments while still diversifying the assets within the portfolio.
Components of a Custom Portfolio
You can consider several factors when constructing a custom investment portfolio – such as types of assets included, risk tolerance and time horizon. Take into account investment liquidity (how quickly you can access cash) and potential returns (especially versus the risk taken).
Stocks and Bonds
A well-rounded custom portfolio includes stocks and bonds. Stocks offer the potential for higher returns but also carry greater risks than bonds, which tend to be more conservative investments with defined income streams.
Public Market Alternatives
Alternative investments can provide unique diversification to your custom portfolio, as well as the potential for higher returns than what you'd get from stocks and bonds alone. However, these types of investments can require additional research prior to investing. Alternative investments may provide exposure to new markets and investment opportunities that you might not get from traditional assets.
Commonly discussed alternative investments include real estate and commodities, both of which can be accessed in public markets. For example, real estate investment trusts (REITs) and commodities funds can be readily traded on a public exchange. These funds also don't usually have minimum purchasing requirements.
Private Market Alternatives
Custom portfolios can also include investments in private markets. These types of opportunities may offer the potential for higher returns than public market alternatives, but they come with higher risk and illiquidity – meaning you may not be able to access your cash as quickly. Investment opportunities in private markets can include art, venture capital, private credit, real estate and private equity.
Private market alternative investments used to be only available to the wealthy. Now it's possible for anyone to receive private market investment recommendations for a custom portfolio.
Why Do You Need a Custom Portfolio?
Proper due diligence and analysis are essential components when constructing a custom portfolio tailored to investor needs and preferences.
A custom portfolio can provide increased diversification benefits by including alternative investments that are not typically available through public markets. By customizing your strategies, you'll be able to invest in the most suitable assets for long-term growth – and potentially maximize returns over time.
Custom portfolios provide investors with flexibility and control over their financial future – allowing them to create a strategy that works best for their needs. By researching alternative investments and understanding what goes into a custom portfolio, you'll be better equipped to make informed decisions about where your money should go. With the right mix of traditional and alternative investments, you can set yourself up for success.
Satisfy Financial Objectives
A custom portfolio helps to make sure your investments are aligned with your unique financial goals – allowing you to determine how your money is invested. Additionally, custom portfolios can help you express thematic views through investing in companies or sectors that are aligned with your values.
How to Evaluate Investments for a Custom Portfolio
Evaluating investments for a custom portfolio requires careful consideration according to metrics like potential risk and return, liquidity, cash flows and how these compare to other investments. Perform due diligence to get a sense of the following factors.
- Yield: Consider the expected yield or the percentage return on investment. You can look not only at absolute yields but also relative yields compared to traditional investments with similar risk profiles. For example, investors must consider whether the return of an asset is sufficiently high to justify its volatility, which is a gauge of risk.
- Risk: Assets intended for custom portfolios should be evaluated for risk. This assessment includes determining the potential for default and credit risks associated with the investment.
- Underlying assets: The value of an investment is sometimes based on underlying assets and the income streams generated. Understanding the underlying assets might require analyzing the investment's performance history, expected returns and associated risks. Investors should also consider whether the asset provides adequate diversification for existing portfolios.
- Liquidity: Determine if investors face any restrictions on when or how much they can withdraw and compare those restrictions with instruments that have similar rates of return. Research redemption fees associated with liquidating investments that could reduce overall returns if withdrawn frequently.
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Build a Custom Portfolio with Alternatives
Creating a custom investment portfolio doesn't have to be overwhelming or complicated. By understanding your financial objectives and risk tolerance, you can make informed decisions about which assets will best help you reach your goals. Using a mix of stocks, bonds and public and private assets – along with an understanding of liquidity and potential returns – you'll be well on your way to creating a custom portfolio that's tailored to you.
Every investor's situation is unique – so your custom portfolio will be different from someone else's. Investing in custom portfolios requires careful research and analysis – but with a strategic approach, they can help you achieve your goals more effectively than with traditional assets alone.
Frequently Asked Questions
Can I create my own stock portfolio?
Yes, you can create your own custom stock portfolio to suit your specific investment goals and risk profile. However, do thorough research before investing and understand the risks associated with particular investments.
What is the 70/30 portfolio?
The 70/30 portfolio is a custom investment strategy that consists of a mix of 70% stocks and 30% bonds. This allocation aims to reduce some of the risk associated with investing in an all-stock portfolio.
What are the types of investment portfolios?
Three types of investment portfolios are conservative, moderate and aggressive. A conservative portfolio generally consists of low-risk investments seeking capital preservation and moderate portfolios have a mix of income and growth-oriented assets, while aggressive portfolios focus on high-risk investments to achieve maximum return.