What is a portfolio?
A portfolio is a collection of financial assets such as stocks, bonds, commodities, currency and cash equivalents, as well as their fund counterparts, including mutual funds, exchange traded and closed. A portfolio can also be made up of securities that are not publicly tradable, such as real estate, art and private equity. Money market accounts fully use this concept to function properly.
The portfolios are held directly by investors and / or managed by financial professionals and fund managers. Investors should build an investment portfolio in accordance with their risk tolerance and investment objectives. Investors can also have multiple portfolios for various purposes. It all depends on the investor’s objectives.
Risk tolerance and time horizon must be taken into account when choosing investments to complete a portfolio.
Understanding the portfolio
An investment portfolio can be thought of as a pie that is divided into pieces of different sizes, representing a variety of asset classes and / or types of investments to achieve an appropriate risk-return portfolio allocation. Many different types of securities can be used to build a diversified portfolio, but stocks, bonds and cash are generally considered to be the building blocks of the portfolio. Other potential asset classes include, but are not limited to, real estate, gold and currency.
Impact of risk tolerance on portfolio allocations
While a financial advisor can develop a generic portfolio model for an individual, an investor’s risk tolerance should have a significant impact on the appearance of a portfolio.
For example, a prudent investor might favor a portfolio with large-cap value stocks, broad-based market index funds, high-quality bonds and a position in high-quality liquid cash equivalents. In contrast, a risk-tolerant investor could add small cap growth stocks to an aggressive large cap growth position, assume some exposure to high yield bonds and seek real estate, international and alternative investment opportunities for him. . wallet. In general, an investor should minimize exposure to securities or asset classes whose volatility makes them uncomfortable.
Key points to remember
- A portfolio is a basket of assets that can include stocks, bonds, commodities, currencies, cash equivalents, and their fund counterparts.
- Non-marketable securities such as real estate, art and private investments can also be included in a portfolio.
- Asset allocation, risk tolerance and the individual’s time horizon are all critical factors when building and adjusting an investment portfolio.
Impact of the time horizon on portfolio allocations
As with risk tolerance, investors should consider how long they should invest when building a portfolio. Investors should generally opt for a more conservative asset allocation as the deadline approaches, in order to protect the capital of the portfolio that has been built up to this point.
For example, an investor saving for retirement might consider leaving the workforce in five years. Despite the comfort level of the investor who invests in risky stocks and other securities, the investor may want to invest more of the portfolio balance in more conservative assets such as bonds and cash, to help to protect what has already been recorded. Conversely, someone who has just entered the workforce may want to invest their entire portfolio in stocks, as they may have decades to invest and the ability to overcome some of the short-term market volatility. .