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A portfolio is one of the most basic concepts in investing and finance. It’s a term that can have a variety of meanings, depending on context. The simplest definition of a portfolio is a collection of assets—stocks and bonds, real estate or even cryptocurrency—owned by one person or entity.
A Portfolio Holds Your Investments
Your portfolio represents all of the investments you own. The term itself comes from the Italian word for a case designed to carry loose papers (portafoglio), but don’t think of a portfolio as a physical container. Rather, it’s an abstract way to refer to groups of investment assets.
It’s not like you can only have one portfolio. People may call the stocks and exchange-traded funds (ETFs) they own in a brokerage account their taxable investment portfolio. At the same time, they could refer to the mutual funds they own in their 401(k) account as their retirement portfolio. The term helps you distinguish between one set of assets and another.
Groups of assets owned by companies or managed by financial firms are also called portfolios. A real estate company can own a portfolio of residential properties, for instance. Portfolio management for clients is one of the main jobs of a wealth management firm.
How To Manage an Investment Portfolio
Building and managing a portfolio is one of the basic tasks of investing—the goal of an investment portfolio is always to build your wealth over time.
“Investment portfolios are appropriate for anyone who wants to grow their income or financial nest egg in the pursuit of a financial goal,” like paying for college, buying a home or funding retirement, says Karyn Cavanaugh, a financial adviser with Carolinas Wealth Management.
Portfolios hold all and any form of investment assets. Financial experts frequently talk about a portfolio of stocks and bonds, but plenty of people build portfolios to invest in gold, real estate or cryptocurrencies, among other asset classes.
Key concepts for managing an investment portfolio include understanding your risk tolerance, diversifying your assets and learning to rebalance your asset allocation.
Risk tolerance is how willing you are to accept the chance of losing money in pursuit of greater returns. That sounds nice in the abstract, but until you put money in the market, it can be difficult to assess your own risk tolerance.
If you’re just getting started with investing, rely on this rule of thumb: Take on riskier strategies involving stocks—either individual stocks or funds—when you’re further from your goal; pursue more conservative strategies involving bonds (or even cash) when you’re closer to your goals.
Here’s how that would work in practice. You’d want a higher concentration of risky assets in a portfolio designed for far-off goals like retirement or your child’s college education, and more stable fixed income assets for near-term goals, like a vacation you’re planning for next year.
Your personal risk tolerance should dictate how your build your portfolio. If you aren’t going to be able to sleep at night because your retirement portfolio is mostly stock funds, it may be worthwhile to choose a more conservative mix of investments even if your retirement is decades away.
It may be cliché, but you rarely want to have all of your eggs in one basket, especially when it comes to building an investment portfolio. That’s why your portfolio requires diversification
A healthy mix of different investment assets—stocks, bonds and cash—and different types of stocks and bonds, keeps your portfolio growing under different market scenarios
In a bull market when stock prices are rising, for example, bond yields are generally declining. Even as you’re potentially losing money in bonds, as well-balanced equity component of your portfolio should make up the difference. In down markets or during a crisis, investors may push up the value of bonds as stocks are heading lower.
One of the easiest ways to achieve portfolio diversification is by investing in index funds and ETFs. When you own low-cost funds in your portfolio, you get exposure to hundreds or thousands of different stocks and bonds in a single security.
You can construct a well-diversified portfolio yourself with as little as two or three funds—or you can let the experts do it with a target-date fund. Financial advisors and robo-advisors can also manage portfolio diversification for you, though this’ll come at a slightly higher premium than if you did it yourself.
Asset Allocation and Portfolio Rebalancing
Asset allocation describes the balance of stocks, bonds and cash in your portfolio. Depending on your investment strategy, you’ll set the percentage of each type of asset in your portfolio in order to reach your goals.
As markets rise and fall over time, your asset allocation tends to get out of whack. Say shares of Tesla surge, the percentage of your portfolio allocated to stocks will probably surge higher, too. Rebalancing describes the process of buying and selling assets to get your portfolio allocation back on track, so as not to disrupt your strategy.
This can be one of the big advantages of letting a robo-advisor manage your portfolio. Nearly all robos handle rebalancing automatically, saving you from the need to keep your allocation balanced.
SoFi Automated Investing
SoFi Automated Investing
4 Common Types of Portfolio
Your portfolio construction is as unique as you are, and you’ll tailor it over time to reflect your preferences and goals. If you’re just getting started, here are some of the most popular portfolio types. (Keep in mind that you’ll probably want to meet with an investment professional before you start building your investment portfolio.)
- Conservative portfolio. This type is also called a defensive portfolio or a capital preservation portfolio. Conservative investment portfolios keep risk low to preserve your investment dollars. They achieve this by owning bond funds and income-producing dividend stocks. Defensive portfolios are widely used by older investors who are nearing retirement or already retired and don’t want to risk losing their capital.
- Aggressive portfolio. Also known as a capital appreciation portfolio. Aggressive portfolios are appropriate for younger or risk-tolerant investors who want to grow assets quickly and don’t mind taking risks. They usually include more volatile investments like growth stocks—shares of companies that are growing very rapidly, but may not yet be profitable. Aggressive portfolios typically include both domestic and international stocks, as well as speculative investments like cryptocurrencies.
- Income portfolio. As the name suggest, this type of portfolio is focused on delivering reliable income, from assets like municipal bonds and dividend-paying stocks. Retirees prefer to build income portfolios to provide themselves with a regular retirement paycheck.
- Socially responsible portfolio. Environmental, social and governance (ESG) and socially responsible investing (SRI) portfolios allow investors to do well financially by doing good for society with their investments. Socially responsible and ESG portfolios can be built for growth or asset preservation and structured for any level of risk or investment goal. What’s key is that they favor stocks and bonds that aim to minimize or reverse environmental impact or promote diversity and equality.