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What is a Portfolio?

investment portfolio

If you have a number of various investments specifically mixed together with the aim of making a good long term profit, this is known as a ‘Portfolio’. The items included in a portfolio can be anything from equities, art, real estate, commodities, equities. All manner of securities can be placed in there. The way you put together this portfolio will determine both the risk associated with and the expected return in terms of profit. A good investment advisor can help you with this in terms of strategy and goals.

So What Types of Portfolios are There?

Well firstly we need to think along the lines of those investments giving the greatest return. This means we have an aggressive investment strategy, and as such we need to have a high risk threshold in order to deal with any fluctuation. These aggressive portfolios will normally carry a high investment in equities over a long time period.

Conversely if you are an investor putting top priority on safety then you are ‘risk averse’ and will generally invest for the short term. This type of portfolio will consist of fixed income instruments or cash and equivalents. The investor is being both prudent and cautious! Let’s take a closer look at both portfolio strategies!

  • The Aggressive Portfolio
    Arrow chart representing aggressive investment portfolio

    This is really meant for investors with a long term view of the markets and what could be conceived as an average to above risk tolerance. What you are trying to achieve here is to balance the total fund wisely. 45 to 55 per cent of this portfolio would probably be made up of equities. 35 to 40 per cent will be given to bonds and a small percentage: say 5 to 10 per cent will be made up with cash.

    At this point we could break the investments down into categories including both large and small corporations. These would involve firms both in the United States and Internationally.

    You might include both short and long term bonds. More experienced investors will go for a mixture of options and futures. The investor has a limitless number of inroads. The best advisors will help you get the best assets together into a portfolio.

  • The Conservative Portfolio

    We all know what inflation is, and the real goal of a conservative portfolio is to protect ourselves from this. In this portfolio you would see your investments hopefully holding their value. There might be a high level of current income from invested bonds. This would also provide long term growth from equities higher in overall quality.

So What are Portfolios All About?

Arrow chart representing aggressive investment portfolio

If you’re familiar with the term ‘diversification’, then this will tell you all you need to know. Performance in each investment will vary over time, so if one tends to dip, then another might perform really well. You are diversifying so when one set of stocks goes down this won’t take out the entire portfolio etc. You are basically investing in different directions to help keep stability within the portfolio itself. Diversification is an important concept in the world of finance and many studies have been carried out to look at the long term effects more closely.

Spreading investments across differing markets reduces the risk of losses and is actually the financial world’s phrase for ‘common sense’. The investor isn’t putting all their eggs into one basket as the saying goes. The fact is if you have the money to invest in a portfolio, then you can take a methodical and sensible long term approach. Due diligence and good research are very important though! Remember the monetary value of each investment could influence the risk/reward ratio of the portfolio. This is called the asset allocation of the portfolio. There are also many investment opportunities in smaller companies and these generally tend to do well, so choose wisely. The wonderful thing about a portfolio is you can sit back and watch your own nest egg grow for the future.

Things to Note

When you hear the financial world referring to ‘the money market’ or ‘cash’, they are talking about three things. Firstly any short term – fixed investment. Secondly any monies in a savings account or a ‘certificate of deposit’, paying a much higher interest. There’s a plenty of extra information out there and you will certainly benefit with the help form a financial advisor.

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