What is a portfolio?
It refers to the collection of financial investments — usually in the form of stocks, bonds, commodities, cash and other assets — that an investor holds with the sole purpose of making a return on them. The different assets included in the portfolio are known as asset classes and make up certain portions of your overall portfolio to reflect your strategy. For example, someone might allocate 50% of their portfolio to stocks, 30% to bonds, and 20% to other assets. It’s up to you how you build your portfolio.
To maximize your chances of making returns and depending on your risk/rewards ratio, diversification is key. Depending on your financial goals and time horizon, your portfolio can be modified at any stage of the investment cycle to meet your desired goals.
KEY TAKEAWAYS
- Portfolios are the group of investments an individual holds with the sole purpose of making a return on them
- They usually consist of a combination of stocks, bonds, commodities, cash and other assets
- How you allocate assets to your portfolio is based on your time horizon and risk appetite
- It's recommended that you build a diverse portfolio that spans various sectors, asset types and countries
How to make a portfolio
Portfolios differ from person to person, and how you construct yours reflects your own goals and risk appetite. Somebody with a long-term strategy and lower risk appetite, for example, is likely to have a collection of stocks, bonds, and index funds, whereas the trader who needs to make some quick wins will have some forex trades which are actively traded more regularly.
To protect you from any hits to an entire industry, it is recommended that you build a diverse portfolio that spans various sectors. If the whole e-commerce industry took a hit, for example, you wouldn’t have wanted to have all your investments in companies like ASOS and H&M. Having some in travel, finance, and tech would have protected your portfolio from a hard hit in that scenario.
Typically speaking, stocks, bonds, and cash are the foundation of the majority of portfolios. Many experienced investors, however, may then build on these investments by introducing other asset classes such as real estate, paintings, and other collectibles. How you allocate your assets is down to you and your own strategy!
Portfolio examples/types of portfolios
The type of portfolio you hold is totally dependent on your time horizon and risk appetite:
- Growth portfolio: With the greatest amount of risk, a growth portfolio is expected to grow quickly within a short period of time.
- Income portfolio: An income portfolio is one that’s expected to generate a sizable return with little risk.
- Conservative portfolio: This portfolio involves the least amount of risk and is focussed on preserving wealth over a long period of time. Someone with a conservative portfolio will invest more in blue-chip companies, for example, to protect themselves from market volatility.