Investment Portfolio: How to Best Build and Manage One
A familiarity with the keystones of portfolio management will help you choose the right one. This article focuses on how to build and manage a portfolio and on what an investment portfolio is, while providing examples.
Investment portfolio management sounds like a vocation reserved for financial gurus and entrepreneurial savants. However, understanding how to build and manage your individual investment portfolio is invaluable knowledge for anyone looking to grow their wealth.
Even if you chose to invest in a pre-built, model investment portfolio, a familiarity with the keystones of portfolio management will help you choose the right one.
What is an Investment Portfolio?
An investment portfolio is a group of financial assets. The typical portfolio definition encompasses investments like stocks, bonds, and cash. However, a general investment portfolio may also include exchange-traded funds (ETFs), bonds, commodities, real estate, cryptocurrency, NFTs, art, and even cash or cash equivalents.
Portfolio investment definitions vary depending on the investor and the asset classes they are investing in. For example, a real estate company’s investment portfolio may be comprised of a number of commercial and residential property holdings. In contrast, an individual investor’s portfolio could feature stocks and ETFs.
Investment Portfolios and Diversification
Portfolio management is based on the concept of diversification. Putting all of your money into a single investment is risky. You wouldn’t want to put all your eggs in one basket, as the old adage goes. Instead, you can cushion yourself from volatility by spreading your investments across various asset classes.
This theory works much like the agonist and antagonist muscle pairs in your body. You have some muscles that contract (agonist) and others that relax (antagonist). When you contract your bicep, your tricep relaxes. Each serves a complementary function.
Likewise, a portfolio with stocks in a single, narrow market sector might perform well in a low-interest rate bull market but crash in a bear market. This could prove devastating if you need to pull funds from your portfolio when the price is down.
As a hedge against risk, savvy investors might split their portfolio between growth stocks, blue-chip stocks, bonds, real estate, and commodities. This way, if interest rates rise and the value of their growth stocks contracts, their holdings in bonds and commodities could pick up the slack.
Not everyone has the time for in-depth research into various financial assets and company profiles. In that case, ready-made investment portfolios like mutual funds typically provide investors with broad market exposure (diversification) minus the homework.
Just as there are various asset classes, there are also different types of investment portfolios. The next section will explore several of these types through examples.
Types of Investment Portfolio with Examples
Investment portfolios come in all shapes and sizes. Choosing the right one for you depends on your risk tolerance, your age, your financial situation, and a host of other factors.Provided below are investment portfolio summaries with examples. These examples will help you flesh out your options and create your personal investment portfolio.