Jun 14, 2022
What Is an Investment Portfolio?
If you’ve been looking into investing, you may have heard the term portfolio.. In the financial world, that might seem like a confusing term. Just what is an investment portfolio? Can you learn how to build an investment portfolio that’s right for you? The answers may be more straightforward than you think.
What is an investment portfolio?
Simply put, a portfolio refers to your collective investments. These investments might include stocks, bonds, cash, exchange-traded funds (ETFs), mutual funds, real estate, or whatever else you’ve decided to acquire. You might think of your investment portfolio as a playlist, with each investment like one song in the list. You could have as many songs as you like, with different genres of music being like different types of investment; altogether, they make up a collection of music.
Second, you can learn how to build an investment portfolio that can help you reach your personal financial goals by assessing your risk profile and determining your financial goals. Your portfolio is a distinct expression of who you are and where you want to go financially, so the investments you choose should reflect that. Plus, your portfolio is meant to be dynamic, and will almost certainly change throughout your investing life as your circumstances and priorities shift.
Investment portfolio diversification
Now that you know what an investment portfolio is, let’s explore some factors that help you decide what to put inside of it. In addition to considering your risk profile and goals, you’ll want to understand diversification when determining how to build an investment portfolio that meets your needs. Diversifying your portfolio means purchasing multiple types of investments so your portfolio’s performance is not tied to a single asset class, industry, company, or geographical region. To go back to the playlist metaphor, imagine a playlist composed of just country music vs. a mix of country, hip-hop, and classical; the latter represents a diversified portfolio.
Diversifying may help temper market losses and increase a portfolio’s gains. Investment portfolio diversification doesn’t guarantee that you’ll see a positive return, but it can help mitigate risk.
Let’s break down the idea of diversification even further. The specific mix of investments in your portfolio is called your asset allocation. Say you have $6,000 invested in stocks and $4,000 in bonds. In this case, your $10,000 total portfolio has a 60/40 asset allocation, because you have 60% in stocks and 40% in bonds. That is certainly more diverse than if your entire $10,000 was invested in stocks. You could diversify even further by spreading your money across more types of investments; for instance, you might put 40% in stocks, 20% in bonds, and 20% in ETFs.
Looking at your asset allocation can help you gauge how diverse your portfolio is. Generally speaking, a more diverse portfolio is less subject to risk and volatility because drops in one type of investment can be balanced out by more stable performance in other types. You’ll always encounter risk with investments; portfolio diversification is one way that can help mitigate it.
How to build an investment portfolio
Now that you’re armed with the answer to “What is an investment portfolio?” and have a sense of what goes into it, you may be ready to learn how to build an investment portfolio of your own.
Remember that investment portfolios are dynamic, not static. The one you create when you’re 25 is not the same as the one you’ll have when you’re 50. For example, a younger investor starting to save for retirement might choose to weight their portfolio toward stocks. Although stocks generally have more volatile returns than bonds, younger investors may have the luxury of time in the face of market volatility. Someone closer to retirement age may want to shift their asset allocation more heavily toward less volatile bonds.
There isn’t a one-size-fits-all approach to building your portfolio. The ideal way to achieve investment portfolio diversification will change over time based on your needs. To begin with, you might want to decide what your risk profile is, then think about your short and long-term goals, and consider the length of time you plan to keep your money invested.
If you’re not sure where to get started or feel unsure about how to build an investment portfolio that’s right for you, don’t worry. Stash has a tool that can help: the Smart Portfolio. It uses your risk tolerance, investing timeline, and goals to automatically allocate your money into a portfolio that reflects your investing style. And because you can invest in fractional shares with Stash, you can get started now with any amount of money.1
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