Investing Basics: What Is A Portfolio?

Investing Basics: What Is A Portfolio?

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

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. Diversification

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 […]

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