However you define “financial freedom,” one thing’s for certain. You’re going to need a well-balanced, growth-focused portfolio to support your financial needs long-term. To accomplish this, your portfolio will almost certainly include a variety of securities that offer different levels of risk, growth potential, income opportunities, and stability.
But which securities, in particular, belong in a portfolio built for achieving financial freedom? And if we take one step back here, what even counts as a security?
Let’s discuss.
What Are Securities in Investing?
The U.S. Securities and Exchange Commission (SEC) defines the term security as “an investment instrument such as a stock or bond.”1
Securities are essentially created by an issuer, like a publicly traded company or government body, and bought by investors. Any publicly traded securities (such as stocks or funds traded on the stock market) are regulated by the SEC.2
Securities come in a few varieties, but we’ll be focusing here on three of the most popular types:
- Equity securities
- Debt securities
- Treasury securities
Equity Securities
Those who seek a life of financial freedom must find a way to accumulate wealth and earn an income beyond actively working. In other words, they need their money to grow on its own.
A growth-focused portfolio almost always prioritizes equity securities, which include individual stocks. Mutual funds and exchange-traded funds can also be considered equity securities, depending on their underlying assets. While these types of securities live on the riskier side of the securities spectrum, they also present the most opportunities for growth.
Individual Stocks
Publicly traded companies issue shares of ownership in the form of individual stocks. From major tech players to small companies in emerging international markets, thousands of corporations allow investors to buy and sell shares on the stock exchange.
What’s unique about equity securities in general, and individual stocks in particular, is that once you buy shares, you actually own a piece (albeit usually a very small piece) of the issuing company. When the company is performing well, you will likely benefit by seeing the value of your shares increasing. Alternatively, if the company performs poorly, your shares will likely decrease in value.
This correlation between company performance and portfolio performance makes individual stocks an especially risky investment for investors. It’s the reason why no (legitimate) investment professional should recommend investing 100% of your capital into one company—even if it’s the most valued company in the world.
Rather, diversifying your holdings should help minimize the impact of any one particular stock going south while giving you the potential to capitalize on positive performance across various sectors, industries, and global markets.
Mutual Funds and Exchange-Traded Funds
Building an entire, well-diversified portfolio of individual stocks can be daunting and require an immense amount of research—not to mention vigilant, near-constant monitoring and regular rebalancing. Another option for incorporating aggressive growth opportunities into your portfolio is to consider funds, namely mutual funds and exchange-traded funds (ETFs).
Here’s the gist: Rather than purchase individual shares in a bunch of companies, you could purchase shares of a fund instead. The fund is managed by investment professionals and analysts who’ve already done the research to decide what stocks should be included (so you don’t have to). By pooling investor capital together, the fund buys stock in companies—often in an effort to mirror an index, like the S&P 500—and sells shares of the fund to investors.
An important distinction is that when you invest in funds, you don’t own stock in the underlying companies. Your shares’ performance will be based on the fund’s overall performance.
Mutual funds and ETFs are considered equity securities as long as their underlying securities are equity securities (like individual stocks). But as funds have grown more popular over the years, they can come in all shapes and sizes, containing other assets like bonds, commodities, real estate investment trusts (REITS), currencies, and more.
Debt Securities
Also known as fixed-income securities, debt securities don’t represent ownership in a company like their equity counterparts do. Instead, debt securities represent money borrowed and the terms of repayment. However, debt instruments, like bonds, are able to be traded much like equity securities, and they also can play an important role in your journey to financial freedom.
While equities are the driver of growth in your portfolio, debt securities can be used to help balance some of that risk. Generally, debt securities are generally considered a less volatile option when considering the full risk spectrum of investment types. Because less risk is usually involved, they typically yield lower returns as well.
However, they may be able to help you accomplish a few other important goals like:
- Generating steady, reliable income,
- Introducing the potential for more stability into your portfolio (which is critical when achieving a work-optional phase of life), and
- Offsetting market risk by helping to minimize volatility.
As we mentioned, debt securities are not entirely free from risk. Rather, they’re more prone to other types of risk, including credit or default risk and interest rate risk.
When you purchase a bond, you’re entering into an agreement with another entity (a company, municipality, government agency, etc.). You purchase the bond from the issuer with the understanding that the issuer will make regular interest payments over the life of the bond. They will also repay the principal amount by the time the bond reaches maturity.
The stability and reliability of a bond depend heavily on the credibility of the issuer and the length of maturity. The more time it takes for a bond to mature, the more risk you’re taking on as an investor. Similarly, the higher the credit rating of the issuer, the more likely they are to pay their debts as promised.
Like stocks, bonds can be bought and sold since their value can fluctuate until maturity based on evolving interest rates and other factors.
Treasury Securities
When you’re enjoying a work-optional or work-free lifestyle, you almost certainly need a percentage of your portfolio to provide protection—even beyond traditional debt securities. But to combat inflation risk, you still need it to grow beyond what a savings account (or goodness knows, a piggy bank in the back of the closet) can offer.
Enter treasury securities. These are debt securities backed by the U.S. Department of Treasury, which makes them one of the most prudent investments an investor can include in their portfolio, according to the SEC.3
Common types of treasury-issued debt include:4
- Treasury Bills (T-bills)
- Treasury Notes
- Treasury Bonds
- Floating Rate Notes (FRNs)
- Treasury Inflation-Protected Securities (TIPS)
Each offering includes varying maturity lengths, interest payment schedules, and interest rates.
How Securities Support Your Financial Journey
Your success in achieving financial freedom is not entirely dependent on how much you earn—it’s about how much you save and invest toward your future, too. Your portfolio will need to reflect your greater financial goals, meaning you must find ways to balance growth-seeking securities with the protection and stability of income-producing assets.
With a diversified portfolio of securities, you can address the various risks that may impact your ability to achieve (or maintain) financial freedom. These include:
- Market risk: Your investments are subject to the volatility of market movements, which are based on investor sentiment.
- Inflation risk: As inflation rises, your purchasing power decreases.
- Interest rate risk: When interest rates rise, debt becomes more expensive. Additionally, bond prices and interest rates historically have an inverse relationship (meaning rising rates = lower bond prices).
- Concentration risk: When you put too great a percentage of your portfolio into one asset or security, your entire portfolio’s performance can become dependent on the performance of that one investment.
Continuing Your Path to Financial Freedom
With only so many hours in a day, your ability to physically work your way to financial freedom just isn’t possible. Instead, you’ll need to incorporate a diverse set of securities into your portfolio that create critical growth opportunities.
As you continue on the path to financial freedom, you may want to speak to a financial professional about your existing portfolio makeup and long-term goals. Together, they can help you identify opportunities to better align your portfolio with what you’ll need to achieve that sense of financial freedom.
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