What Is a Financial Portfolio?

A portfolio is a collection of financial investments such as stocks, bonds, commodities, cash, and cash equivalents including clos𓄧ed-end funds and exchange-traded funds (ETFs).

People generally believe that stocks, bonds, and cash create the core of a portfolio. This is often the case but it doesn't have to be the rule. A portfolio can contain a wide range of assets including real estate, art, and private investments.

You might choose to hold and manage your portfolio yourself or you may allow a money manager, financial advisor, or another finance professi♏onal to manage your portfolio for you.

How Financial Portfolios Work

One of the key concepts in portfolio management is the wisdom of 澳洲幸运5开奖号码历史查询:diversification: not putting all your eggs in one basket. Diversification tries to reduce risk by allocating investments among various 🐷fi❀nancial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

There are many ways to diversify. How you choose to do it is up to you. Your goals for the future, your appetite for risk, and your personality are all key factors in de♚ciding how to build your portfolio.

All portfolios should contain some degree of diversification, regardless of your portfolio’s asset mix. They should reflect the investor’s tolerance for risk, return objectives, 澳洲幸运5开奖号码历史查询:time horizon, and other pertinent constraints. These can include tax position, 澳洲幸运5开奖号码历史查询:liquidity needs, le꧑gal𒈔 situations, and unique circumstances.

Managing a Portfolio

Think of an investment portfolio as a pie that's been divided into pieces of varying wedge-shaped sizes, each piece representing a different asset class and type of investment.

Investors aim to construct a well-diversified portfolio to achieve a risk-return portfolio allocation that's appropriate for their level of risk tolerance. Stocks, bonds, and cash are generally viewed as a portfolio’s core building blocks but you can grow a portfolio with many types of assets including real estate, 澳洲幸运5开奖号码历史查询:gold stocks, various types of bonds, paintings, and other art 澳洲幸运5开奖号码历史查询:collectibles.

This sample portfolio allocation is for an investor with a low tolerance for risk. A conservative strategy generally tries to protect a portfolio’s value by investing in lower-risk securities. You’ll see in this example that a full 50% is allocated to bonds that might contain high-grade corporates and government bonds including 澳洲幸运5开奖号码历史查询:municipals (munis).

The 20% stock allocation could be made up of blue-chip or large-cap equities and 30% of 澳洲幸运5开奖号码历史查询:short-term investments might include cash, certificates of🍎 deposit (CDs), and high-yield sa༒vings accounts.

Types of Portfolios

There can be as many types of portfolios and portfolio strategies as th🍷ere are investors and money managers. You might also choose to have multiple portfolios whose contents could reflect a different strategy or inves🐈tment scenario structured for a different need.

The Hybrid Portfolio Approach

The hybrid portfolio approach diversifies across 澳洲幸运5开奖号码历史查询:asset classes. Building a hybrid portfolio requires taking positions in stocks as well as bonds, commodities, real estate, and even art. A hybrid portfolio generally entails relatively fixed𓆏 proporti🌱ons of stocks, bonds, and alternative investments. This is beneficial because stocks, bonds, and alternatives have historically exhibited less-than-perfect correlations with one another.

Portfolio Investment

You expect that the stock, bond, or another financial asset will earn a return, grow in value over time, or both when you use a portfolio for investment purposes. A portfolio investment may be either 澳洲幸运5开奖号码历史查询:strategic where you buy 𝓀financial assetsꦿ with the intention of holding onto those assets for a long time or tactical where you actively buy and sell the asset hoping to achieve short-term gains.

Aggressive Equities-focused Portfolio

The underlying assets in an aggressive portfolio generally assume great risks in search of great returns. Aggressive investors seek companies that are in the early stages of their growth and have a unique 澳洲幸运5开奖号码历史查询:value proposition. Most of them aren't yet common househo🌃ld names.

Defensive Equities-focused Portfolio

A defensive portfolio would tend to focus on consumer staples that are impervious to downturns. Defensive stocks do well in bad times as well as in good times. Companies that make products that are essential to everyday life will𝓀 survivꦦe no matter how bad the economy is at a given time.

Income-focused Equities Portfolio

This type of portfolio makes money from dividend-paying stocks or other types of distributions to stakeholders. Some of the stocks in the income portfolio could also fit in the defensive portfolio but they're selected primarily for their high yields in this case. An income portfolio should generate positive cash flow. 澳洲幸运5开奖号码历史查询🔯:Real estate investment trusts (REITs) are 🦹an example of an income-producing investment.

Speculative Equities-focused Portfolio

A speculative portfolio is best for investors who have a high tolerance for risk. Speculative plays could include 澳洲幸运5开奖号码历史查询:initial public offerings (IPOs) or stocks that are rumored to be ta🐬keover targets. Technology or healthcare firms in the process of developing a single breakthrough productꩲ would also fall into this category.

Time Horizon and Portfolio Allocation

Investors should also consider how long they have to invest when they're building a portfolio. Investors should generally move toward a conservative asset allocation as their goal date approaches to protect the portfolio’s earnings up to that point. A conservative investor might favor a portfolio with large-cap value stocks, broad-based market index funds, investment-grade bonds, and a position in liquid, high-grade cash equivalents.

Take an investor who's saving for retirement and plans to leave the workforce in five years. They might want to invest a larger portion of the portfolio in more conservative assets such as bonds and cash to help protect what has already been saved even if they're comfortable investing in stocks and riskier securities.

An individual who's just entering the workforce might want to invest their entire portfolio in stocks because they have decades to invest and the ability to ride out some of the market’s short-term 澳洲幸运5开奖号码历史查询:volatility.

The Bottom Line

A portfolio is the cornerstone of investing in the markets. It's composed of the various positions in stocks, bonds, and other assets held and is viewed as one cohesive unit. The portfolio components must therefore work together to serve the investor’s financial goals, constrained by their risk tolerance and time horizon.

Portfolios can be constructed to achieve various 🅠strategies, from index replication to income generation to capital preservation. Diversification is seen as a good way to reduce risk regardless of the strategy without sacrificing the portfolio’s expected return.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our 澳洲幸运5开奖号码历史查询:warranty and liability disclaimer for more info.