Portfolio Restructuring: A Decision-Making Perspective

Portfolio Restructuring: A Decision-Making Perspective

To understand how to build a portfolio, we need to understand what the term means and what it implies. This is necessary to understand what role a portfolio plays. A portfolio is actually a leather bag, a type of briefcase. No, seriously. The original meaning of the word is simply a bag designed to carry documents in.

However, the word's meaning in personal finance has evolved a great deal. At au fait, we don't think it makes sense to use the word to just refer to a collection of all of someone's investments. A portfolio is a lot more than a collection. For individuals, the best way to plan their investments is to have a separate portfolio for each financial goal.

Different mixes of funds, stocks and other assets lead to different risk levels and different gain expectations. Most people find it difficult to match these to what they want. If you're asked, 'What is your risk level?' you'll probably give an answer of some sort but it will just be a gut feel thing.

Each of these goals is very precise. The risk you can take with it, as well as the amount of money needed can be quantified quite precisely. Therefore, it is relatively easy to decide what kind investments should be made for each of them. In the au fait way of thinking, there is no concept of an individual's portfolio.

Instead each individual must have many portfolios, one for each financial goal. The other important thing is that a portfolio is not simply a collection. It has different parts that fit together in specific roles and complement each other. There could be three funds, of which one provides gains and two stability. In hindsight, it'll later appear that you could have stuck with one or the other but both types played a role.
With experience, you'll learn the basics of constructing a portfolio as well as learn about some model portfolios.