A portfolio is a collection of your financial assets. Your portfolio shows your investment scope and risk tolerance.
For example, you plan to invest $10,000 in total. You have limited risk tolerance but want to take a chance at high-volatility investments. You decide that the maximum loss you can bear is $3,000. So, here is how you decide to allocate your money.
To be safe, you put $3,000 in municipal bonds and another $3,000 in utility stocks. You put $1,000 in an ETF tracking the S&P 500 index. For the remaining $3,000, you put $1,000 in an emerging medical stock and $2,000 in another meme stock.
This is what your portfolio looks like:
Based on different investment horizons, portfolios roughly fall into the five groups below.
Aggressive portfolios are for those who look for capital appreciation and have high risk tolerance. This portfolio holds high volatility investments, mainly growth stocks.
Investors holding this type of portfolio can see their assets appreciate quickly. However, they can potentially bear heavy losses too.
Defensive portfolios are for investors with a low risk tolerance, aiming to preserve the value of their investments. This portfolio holds stocks in the utility/consumer staples sector, bonds, mutual funds, etc.
The portfolio tends to hold value even when the market is volatile. Investors can expect to receive dividends as income rather than profit from capital appreciation.
Income portfolios, as the name implies, deliver income. This portfolio holds stocks paying stable and high dividends, dividend ETFs, municipal bonds, etc.
The portfolio tends to offer a relatively stable stream of income. However, it could be affected by economic cycles.
Speculative portfolios are only suitable for high-risk-tolerance investors. This portfolio holds initial public offerings (IPOs), penny stocks, stocks of tech and healthcare companies working on a breakthrough product.
Speculative portfolios carry high risks. Despite the possible high returns, investors should be prepared to lose every penny invested.
A hybrid portfolio puts investments across different asset classes. It mainly invests in multiple blue-chip stocks, bonds, and also cash equivalents, ETFs, etc.
The benefit of diversification is that the entire portfolio will not be likely to plunge if one type of asset takes a blow.
Now that we’ve learned what a portfolio is, let’s see how to build a portfolio in the next lesson.