What Is an Investment Portfolio? Your Questions, Answered

How many Americans take financial advice? Planning your financial future is no easy task and yet 75% of people are winging it. When most people can’t cover unexpected expenses of $1,000 and live paycheck to paycheck some good advice is exactly what they need.

So, what is an investment portfolio? If you’ve wondered about this before, here’s your answer. Read on to learn about investment portfolios and how to build one.

What Is an Investment Portfolio?

An investment portfolio is a collection of bonds, cash, stocks, and perhaps other assets. These assets are held together as part of a basket of investments that are intended to earn you a return on your investment. The return on the investment is planned to meet your financial goals.

What Are Financial Goals?

Your financial goals are particular to you. They reflect your circumstances, needs, and wants for your financial future.

These goals could be to achieve financial security. They could be to provide an income in the future such as in retirement.

Some people have investment portfolios where the financial goals are less serious. You could have an investment portfolio where your goals are about having fun. Investments can be a hobby just as consuming and perhaps more rewarding than sports, collecting, or traveling.

What Are Assets?

Assets can be identified as being in different asset classes. Some asset classes are equities, bonds, cash, and real estate. It’s important to understand what these asset classes are and how they differ from each other.

As an example, equities are shared in the ownership of a company. They don’t give a fixed return and they earn you a return in two ways.

Firstly, their value can vary depending on the fortunes of the company that issued the shares. Their value is also affected by general economic conditions. Trading in these shares can earn you money if you buy them when they are at a low price and sell them at a high price.

Secondly, the company issuing the shares pays a dividend to the shareholders. This is dependent on the performance of the business. It’s your reward for investing in that business.

Stocks are generally more volatile investments. The returns can variable over time and between different companies. They may also vary between national economies or regions.

Bonds are a safer form of investment with more security for your initial investment. They are based on government or company loans that pay a fixed rate of interest. The returns may be less exciting but more secure.

Certificates of deposit are similar to bonds in that they are a relatively secure investment. They take the form of cash, deposited at a bank in return for a fixed rate of interest. They are typically a shorter-term investment for a few months rather than a bond which might be for several years.

What Is Asset Allocation?

An investment portfolio is an approach to investing that regards holding a mixture of assets is beneficial. Deciding what proportion of your investments is committed to each type of asset is called asset allocation.

Asset allocation or the way funds are split between different asset classes is a matter of judgment. It’s not an exact science. If it were a simple decision, then everybody who made investments would be successful.

Some investments do achieve a return. Other investments don’t achieve a return and it’s possible to make losses. This is as well to be aware of whenever making decisions about investments.

The decision you make about the asset allocation of an investment portfolio is based on your attitude to risk and your time horizon.

Image Credit: Marco Verch Professional Photo via Flickr CC 2.0

What Is Investment Risk?

We all have different attitudes to risk. This can be determined by our circumstances and life-stage. It can also be a function of our personality.

Any investment brings a certain amount of risk with it. If you have no tolerance for risk or, in other words, you cannot afford to lose any money, then you should put your money into a bank savings account. You could also use a certificate of deposit as a vehicle for a very safe investment.

If you have some tolerance for market variability then you could venture into less secure investments. You will hope that in return for taking more risk you may get better rewards. You have to be prepared to lose money, at least in the short term.

What Is A Time Horizon?

As well as tolerance for risk, you should consider when you need to have your investment money back. Also, you should consider when you hope to have made gains.

A short terms investor probably can’t tolerate much market volatility. A fall in the markets could mean you suffer losses and have no time to recover before you need the money back. Shorter-term investments must be with lower risk, lower volatility asset classes.

If you don’t need your money back for 30 years, you can tolerate greater volatility. Your hope will be a short term drop in the market will have recovered and made some growth before you need your money back. A longer-term investment could, therefore, be a stock investment with a potentially great return but which might make some short term falls in value.

All-Seasons Portfolio

An all-seasons portfolio is an attempt to weather the storms of market volatility by diversifying assets. The mix of stocks, bonds, commodities, and gold provides some protection against volatility while also providing growth.

The asset allocation in an all-season portfolio includes some stocks that may give greater returns but there is less than a third of the portfolio exposed to this asset class. The remainder of the investment is in relatively low-risk asset classes.

Unless you are an investment expert, take financial advice before investing.

Your Investment

What is an investment portfolio to you? It could be the answer to your financial needs. It’s your financial security, your lifestyle dreams, or just for fun.

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