Establishing a balanced portfolio is one of the fundamental building blocks of investing and financial literacy. Portfolio holdings can include digital and physical assets such as the conventional holdings of stocks, bonds and commercial real estate and extend to alternative investments such as private equity interest, venture capital and exposure to energy-based income.
It is widely accepted that a diversified portfolio is preferable for investing. Even with this commonly accepted truth, many investors fail to implement this foundational strategy when making decisions about their financial future. This error results in portfolios with more significant exposure to market volatility and downside risk due to over-concentrated holding.
Portfolio Diversification
Diversification is common in everyday life. When applied to the world of investing, it typically relates to describing a technique of managing holdings of various asset classes within an investment portfolio. Evaluating current portfolio holdings to assess the risk and exposure to changing capital markets is one of the first steps in assembling a balanced portfolio. These strategies will differ based on the financial goals of its manager. Diversification portfolio managers have a setting to choose holdings in a way that enhances returns while managing market risk through non-correlated investment classes. These classes are described as the following:
Cash and cash equivalents — checking and savings accounts, treasury bills, CDs and money market accounts
Private Equities — stock holdings of private companies
Fixed-Income Products — private or public bonds and asset-backed securities
Physical/Hard Assets — commercial real estate, blue-chip art, gold and commodities
Knowing these four investment classes gives an investor a road map to build an optimal portfolio that acknowledges market risk while also striving for value appreciation.
Finding Investments For Portfolios
Most commercial banks provide checking and low-yield savings accounts. They also typically have relationships (internal or external) to provide their customers with investment options into CDs and money market accounts. These options check the box for cash and cash equivalent holdings within a portfolio and are typically the most accessible for investors.
The access to ownership and portfolio exposure to private equity investment opportunities has dramatically expanded in recent years thanks to enhancements to the 2012 JOBS Act, which laid the foundation for investors to purchase common or preferred stock in private companies. Historically, these private equity holdings were only accessible to well-capitalized firms with known track records of similar investment history. An entire segment of investment platforms exists for investment offerings into private companies, including NetCapital, WeFunder, StartEngine and Republic.
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