Do you want to improve your financial health and achieve your goals? Then, you need to clean up your financial portfolio. It’s easy to do it with these five steps.
Are you too consumed with FOMO over the end-of-season sale or the must-see BOGO deals, Coupons, Flash Sales, and introductory sale offers? You fill your wardrobe with everything that is either new on the market or that you may need in the future. Ultimately, you’re left with guilt, empty pockets, and a cluttered closet.
Your financial portfolio is no different. Most of us make it overstuffed like our messy closet. We make investments on a whim or inspired by the top recommendations of our friends or advisors just to never look at them again.
Take a moment to consider the following questions. Do you open accounts and then leave them? Do you have funds that overlap and charge insane fees? Have you stacked multiple funds with the same theme or sector to diversify? If you answered yes to any of these questions, it’s time to cleanse your financial portfolio.
Cleaning up your financial portfolio is quite similar to organizing your overflowing closet. Cleaning allows you to eliminate things you don’t need, organize things you need, and make room for things you want. It can also assist you in saving money, reducing stress, and achieving your financial goals more quickly.
To assist you in spring-cleaning your financial portfolio, we have created this article that breaks down the time-consuming process into five simple steps backed up with a financial portfolio example. Following these steps, you can transform your financial portfolio from a chaotic mess to a well-oiled machine.
Let’s get started.
Explained: Building A Financial Portfolio
To simplify building a financial portfolio, we have broken the process into four simple steps-
- Define your goals: “Knowing Yourself First” is a crucial step. First, identify your financial ambitions, such as retirement, education for your children, travel, and building the home of your dreams. And so, how much money do you need to achieve your goals? Third, when you require it. It will help you determine your time frame and required rate of return.
- Assess your risk tolerance: Not all market investments bear the same risk. As the proverb states, “No pain, no gain,” implying that higher risks lead to higher returns. So, assess your willingness and ability to take risks with your investments and your reaction to market fluctuations. It will help you figure out the appropriate risk level for your portfolio.
- Choose the Right asset mix: The placement of your money invested across different asset classes, such as stocks, bonds, cash, and alternative investments, is referred to as asset mix. This distribution is based on your objectives, risk tolerance, and time horizon. You can also diversify your portfolio within each asset class by choosing different sectors, industries, regions, and styles or by blending assets.
- Periodical Financial Portfolio Analysis: Carefully monitor your portfolio’s performance to weed out the slackers. Your returns must align with your financial objectives to keep your financial portfolio in good shape. You may need to make some difficult investment decisions during the process, such as buying or selling assets, to maintain your desired allocation and risk level. You may need to adjust your portfolio if your goals, risk tolerance, or market conditions change.
Let me share an interesting Financial Portfolio Example with you- Say there are three friends, Amar, Akbar, and Anthony, of the same age of 35 years. All three friends have the same financial goal of building a corpus of Rs. 1 crore. But they have different risk perspectives and return expectations.
Take a look at the table below-
| Return Expectations | Amount Needed | Monthly Savings (in Rs.) * | Asset Allocation | |
| Amar | 15% | 1 cr | Rs. 2590 | 70-80% Stocks 20-30% Bonds |
| Akbar | 12% | 1 cr | Rs. 4317 | 60-70% Stocks 30-40% Bonds |
| Anthony | 10% | 1 cr | Rs. 5853 | 50-60% stocks 40-50% Bonds |
This brings us to another important concept of Financial Portfolio Management.
What is Financial Portfolio Management?
Financial portfolio management is managing your assets, such as stocks, bonds, real estate, and cryptocurrencies, to match your long-term financial goals and risk tolerance within a predetermined timeline. Now, in the above financial portfolio example, we will see how effective portfolio management can bring you closer to your goal of saving Rs 1 crore:
- Pick the right investments that suit your income, budget, and timeline. For example, you may want to invest in a mix of stocks, bonds, mutual funds, and other assets that can offer you a high rate of return and diversification benefits.
- Allocating your assets according to your risk appetite and expected return. For example, you may want to adjust the proportion of your portfolio invested in different asset classes based on your age, life stage, and market conditions.
- Rebalancing your portfolio periodically to maintain your desired asset allocation and risk level. For example, you may want to sell some of the assets that have increased in value and buy more that have decreased in value to restore your original portfolio balance.
- Reducing your tax liability by taking advantage of tax-efficient investments and strategies. For example, you may want to invest in tax-saving instruments, such as public provident fund (PPF), national savings certificate (NSC), or equity-linked savings scheme (ELSS), that can lower your taxable income and increase your after-tax returns.
Five Easy Steps to Cleanse Your Financial Portfolio
These five steps distill everything we’ve talked about so far, and by following them, you can create your customized roadmap for starting the cleaning process.
- Revisit your financial goals and current investment portfolio, and check if they are aligned. Using data lets you avoid distractions from ongoing trends.
- Chalk out the junk investments that are underperforming or irrelevant, and trim down your portfolio.
- Restructure your portfolio according to your risk tolerance, investment objectives, and time horizon.
- Review your portfolio periodically and rebalance it per the market conditions and changing needs.
- Seek professional help from a professional financial advisory services or an expert if you need guidance or advice.
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Benefits of Cleaning Your Financial Portfolio
- Well-Balanced Financial Portfolio: To restore the original or desired asset allocation, you sell some assets and buy others. This helps maintain the portfolio’s risk and return profile and avoid overexposure or underexposure to any asset class.
- Reduce Cost: While doing your financial portfolio analysis, trim the portfolio. Eliminate any underperforming, unwanted, or dump laggard investments. Instead, invest the proceeds in better-performing or more suitable options. This helps to reduce the costs, taxes, and complexity of the portfolio and to improve the efficiency and returns of the portfolio.
- Portfolio Consolidation: This means transferring the assets from multiple accounts to fewer accounts, such as one brokerage account, one retirement account, and one bank account. This helps to reduce the fees, paperwork, and hassle of managing multiple accounts and to simplify the portfolio and the financial planning process.
- Build up a cash reserve: Keep some money in a high-yield savings account or a money market fund that offers liquidity and safety. This helps to meet any short-term needs or emergencies and take advantage of any market opportunities without selling the investments at a loss.
The Bottom Line
With a disciplined approach and patience, you can achieve all three basic objectives of financial portfolio management: maximizing your return on investment, capital appreciation, and beating the benchmarks. In carrying out our daily responsibilities, we frequently need to catch up on our goals and end up overstacking our portfolio, which causes more harm than good.
Cleaning up your financial portfolio is a healthy routine and a sound financial strategy. By removing the clutter, you can focus on investments relevant to your risk profile, time horizon, and objectives.
Regular upkeeping of your financial portfolio helps you save on costs, taxes, and fees by simplifying your portfolio and avoiding unnecessary duplication or overlap. A clean portfolio is easier to monitor and rebalance and can help avoid emotional or impulsive decisions.
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FAQs
At what intervals should I examine and modify my portfolio?
You should review your portfolio at least once a year or whenever your financial situation, goals, or market conditions change significantly. Rebalancing your portfolio involves adjusting the weights of your assets to maintain the risk-return profile you desire.
What are some signs that I need to clean up my portfolio?
Some signs that you need to clean up your portfolio are: You have too many or too few investments, you have overlapping or redundant investments, you have underperforming or irrelevant investments, you have high costs, taxes, or fees, and you have difficulty tracking or managing your portfolio.
How can I clean up my portfolio effectively?
You can successfully tidy up your portfolio by following these steps: revisit your financial goals and current portfolio, weed out the bad investments, revamp your portfolio based on your risk-return profile, analyze your portfolio regularly and rebalance it as needed, and seek professional help if needed.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.