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What is a Portfolio?


A portfolio is a collection of assets, such as stocks and bonds — think of it as a basket holding all of your investments.

🤔 Understanding a portfolio

A portfolio highlights your money, much like a school or artist portfolio highlights your best work. It’s usually a collection of stocks, bonds, and cash — but more broadly, can include other assets, such as currency, gold, art, real estate, and investments in private companies. If you have one single investment (such as stock in a fictional company X), you don’t have a portfolio. But, as soon as you invest in stock in a second company, you do. A portfolio, by definition, doesn’t require you to have several different assets, just more than one –- Although diversification can be to your advantage, as we discuss later. Many factors should drive the assets in your portfolio: primarily the amount of risk you’re willing to take and the length of time you plan to own the assets.


Let’s say your investments include $100 worth of Apple stock, $50 in General Electric corporate bonds, $150 in New Jersey municipal bonds, and $500 in an index fund that seeks to track the S&P 500. Well, that’s your portfolio — 75% in stocks ($600 total) and 25% in bonds ($200 total).


A portfolio is your investment pie...

Each asset represents a slice of the pie, whether it be stocks, bonds, mutual funds, exchange-traded funds (ETFs), cash, etc. The size of each slice is proportionate to how much you own. If 50% of your entire portfolio is in stocks, the stock slice will represent half the pie. The types of assets you own and how much should be determined by many factors, including your risk tolerance (how much risk you can handle) and your time horizon (how long before you need the money that you’re investing).

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What is a portfolio?
What is the purpose of having a portfolio?
How to build a portfolio
What is portfolio risk?
What is portfolio rebalancing?
What is a diversified portfolio?
What should be in a portfolio?

What is a portfolio?

A portfolio is a 30,000-foot view of your investments. It’s the big picture — the breakdown of stocks, bonds, etc. you own. A strong portfolio should mix assets in such a way that you are poised to get the best return possible within your chosen level of risk. The mix of assets in your portfolio should be determined in part by how much risk you’re willing to take and how long before you’ll need the money.

Portfolios can take many shapes and are sometimes just a mix of a single asset class, such as stocks. However, there are recommendations and best-practice guidelines on what to include in your portfolio. Your age, income, risk tolerance, etc. helps determine the best asset allocation for you.

Your portfolio is ultimately made up of the assets you own. But, it generally only includes assets you own for investment purposes, so your car and your home typically aren’t included in your portfolio.

What is the purpose of having a portfolio?

Portfolios are built to help you oversee and manage your investments. They provide a snapshot of your investments and allow you to quickly see where your money is and how your different assets are performing.

If you’re trying to diversify your assets (have a mixture of stocks, bonds, etc.), a portfolio can help you achieve this. By easily monitoring how much of your investment is in each asset, you can pinpoint what you may wish to buy more of, or cash in.

Imagine you want 60% of your total investments to be in stocks. How do you know when you’ve achieved this? By bringing all of your assets together in one basket and grouping them by asset class (stock, bond, etc.), you can quickly see how much you hold of each type.

How to build a portfolio

Building a portfolio can be as simple as buying a few stocks. Many people start there. However, research suggests that building a portfolio that manages return, while effectively controlling risk, involves having a mix of assets. That mix of assets is your asset allocation.

There are three main ways to build an actual portfolio: 1. Pick individual assets yourself 2. Invest in an actively managed mutual fund or index mutual fund 3. Hire a financial advisor to choose investments for you

As mentioned, you can pick a selection of stocks. Or you can pick a mix of stocks and bonds. This assumes you’re investing on your own and building your own portfolio.

One alternative to picking your own stocks is to invest in an actively-managed mutual fund or an index mutual fund (both of which can invest in a variety of stocks).

Another alternative to building a portfolio yourself is to hire a financial advisor (someone that gives you advice on investing and money management) to set up an asset allocation for you.

An asset allocation that you’re comfortable with will determine your blend of assets. Asset allocation is the percentage of your portfolio each asset makes up. Such as owning 80% stocks and 20% bonds. The breakdown of how much of each security (financial items with monetary values) you own — relative to the rest of your portfolio — is your portfolio weighting and determines how big each piece of pie is.

The key to building a portfolio is understanding two key things: 1. your risk tolerance 2. your time horizon

These two key parameters will help determine what types of investments you have in a portfolio. And typically, the two work in tandem. In other words, investors with longer time horizons (such as more years until retirement) typically have higher risk tolerances than investors who expect to cash out their investments in the short term.

High risk and long time horizon More aggressive investors with higher risk tolerances and longer time horizons tend to own more stocks. That’s because stocks offer more upside, although they are also more volatile and bring more risk. Smaller-cap stocks (companies with market capitalizations of $2 billion or less) and growth-focused stocks are examples of investments that may be considered by this type of investor, as they offer potentially higher return but bring more significant risk.

Low risk and short time horizon Conservative investors that are more risk-averse will usually have portfolios made up of more bonds and large-cap stocks (typically companies with market capitalizations above $10 billion). That’s because bonds and larger stocks tend to be less risky than growth stocks and smaller-cap stocks.

What is portfolio risk?

In its simplest form, risk is the chance you’ll lose money. There are different levels of risk tolerance, such as conservative or aggressive. Asset allocation will be determined in large part by your risk tolerance (how much you can stomach the rise and fall in an asset’s price).

Portfolio risk is the risk that your entire portfolio will decline in value at the same time. A concentrated portfolio of just one type of asset runs the risk of falling more than a diversified one. That’s true for all assets — If you own mostly real estate in your portfolio and the real estate market falls, your portfolio will decline. This type of risk is referred to as unsystematic risk — Also known as an industry- or company-specific risk. This type of risk can be lowered with diversification.

Your risk level is also partly determined by the length of time before you need the money. If you need your money soon, you’re better off investing in more conservative assets. Needing your money later on in life can allow you to be an aggressive investor.

So if you need the money in the short-term, your portfolio should typically be focused on short-term investments. Being further from your goal date, you can take more risks and be aggressive. The idea is that you’ll have more time to make up for losses or volatility.

Digging deeper — individuals looking to use the money in their portfolio to buy a house soon might choose to stay conservative and limit their investments to less volatile assets. Those that are young and are saving for retirement may choose to allocate a large portion of their portfolio toward risky assets. Stocks tend to offer more upside over the long-term, but they bring higher volatility. Bonds offer less long-term upside but are generally less risky. Investing is about trade-offs.

What is portfolio rebalancing?

The price of some assets will rise over time as others fall. As a result, your asset allocation could change. For example, imagine that stocks have been doing well relative to other assets since you created your portfolio. You should now own a higher percentage of stocks compared to other asset classes in your portfolio.

Rebalancing means you want to shift your portfolio back to where it’s more in line with your targeted asset allocation. The rise in stock prices has been good to your portfolio, but it could expose you to more risk than you intended if you don’t rebalance.

So to do that — you’d want to sell some of your stocks and invest that money in other assets that may have declined compared to other assets classes, such as bonds. This will shift your portfolio weightings back toward your desired asset allocation.

What is a diversified portfolio?

A diversified portfolio can help you manage risk by including different performing investments that tend to smooth out returns. I.e., the gains are not as high, but the losses are not as low either. Owning 100% of a single asset can put your investments at unacceptable levels of risk. For example, if you own just stocks and the stock market falls, your portfolio will likely decline compared to owning both stocks and bonds.

That’s because bonds tend not to fall as steeply as stocks, and bonds usually provide an income that further helps to add back to performance. With a diversified portfolio, even if some assets decline, your other assets could grow, helping limit your losses.

The trick is to find assets that don’t move in tandem with each other. That is, if an asset is performing poorly, you’ll want to own an asset that will do well during that time — kind of like a balancing act. It’s like planning for your weekend — you will go to the beach if it’s sunny, and do movies if it’s raining. That’s a diversified weekend plan. Going to the beach or playing golf is not diversified — if it rains, you’ll lose with both plans.

Diversification doesn’t prevent loses, but it does help limit losses. A properly diversified portfolio will include assets that don’t move together. This refers to assets that have not moved in the same direction historically, such as stocks and bonds.

Building a diversified portfolio typically involves owning assets of varying asset classes to reduce the risk of volatility. Using a mix of stocks, bonds, and cash can allow investors to build a diversified portfolio. Adding real estate, gold, currency, and other assets can further help with overall diversification. That’s because some of these assets do well when others are doing poorly. Again, things can balance out.

If you’re only using stocks, a lot of research suggests that as little as ten stocks can create diversification. But others believe that it takes as many as 30 to build a diversified portfolio.

A portfolio of only stocks should have a level of diversification within the stock market. This includes owning a mix of companies focused on growing earnings versus paying steady dividends, as well as large-cap versus small-cap stocks. Diversification can help lower your portfolio’s risk without lowering your return.

What should be in a portfolio?

No single asset allocation is ideal for everyone. What’s included in an individual’s portfolio will vary from person to person, depending on their situation. However, typical investments for a conservative investor might consist of cash, large-cap, and value stocks. Other conservative investments may consist of index funds, ETFs, and investment-grade bonds.

More aggressive investors will typically invest in small-cap and growth stocks or high-yield bonds. Other aggressive style investments include real estate and alternative investments, such as commodities and currency. 20191028-995975-3000245

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