Your investment portfolio is an overview of all the assets you have working on your behalf. This typically includes assets like stocks, bonds and exchange-traded funds (ETFs). But an investment portfolio can also be made up of other types of investments. This can include low-risk options like high-yield savings accounts or certificates of deposit.
As you build a financial portfolio, keep in mind your money goals and current situation.
Vault’s Viewpoint on Investment Portfolios
- Investment portfolios include a variety of assets and are designed to help you build future wealth.
- How you build a good investment portfolio depends on factors like your risk tolerance, financial goals and how much involvement you want in portfolio management.
- Regularly review your investment portfolio to make sure it’s still meeting your needs and expectations.
Investment Portfolio Definition
Your investment portfolio is a representation of all the assets you have. These assets are usually investments that make you money. They can include securities like stocks, bonds, mutual funds and exchange-traded funds (ETFs). Other assets might include real estate investments, cryptocurrencies and accounts you use for advanced strategies like options trading, short selling or trading futures contracts.
In many cases, your total financial portfolio will include a variety of investment accounts. For example, if you contribute to a 401(k) through your work, you might also have an individual retirement account (IRA), a taxable investment account and own a rental property. All of these different accounts and the assets in them can be viewed as parts of your overall investment portfolio.
Factors to Consider When Building an Investment Portfolio
As you’re creating a strategy for how to invest your money, think about your preferences and circ*mstances. Different factors will influence the process you use when creating your investment portfolio.
Risk Tolerance
The best investments for you depend on your risk tolerance. There are two main parts to your personal risk tolerance:
- Financial risk tolerance refers to the numbers. What’s the size of investment loss you can handle in your current financial situation? Basically, it’s how you measure the amount of money you can risk in relation to your potential gains.
- Emotional risk tolerance is all about your mental state as you watch the ups and downs of the market. You need to be able to balance the numbers with how well you’ll sleep at night.
Risk tolerance changes over time. You might decide to include a much higher percentage of stocks (considered higher risk) in your investment portfolio when you’re younger, but shift your asset allocation to more bonds (considered lower risk) as you approach retirement.
Your Investment Style
How you prefer to manage your portfolio also influences how you create it.
Some investors are hands-off. They want to stick to a basic formula, so choose index funds, mutual funds or ETFs to create a portfolio.
Robo-advisors might also work well for those with a hands-off approach. Instead of choosing investments for your portfolio, you can instead let an algorithm do the heavy lifting. You just send a set amount each month to your account and your portfolio is built and managed for you.
Other investors prefer to be more involved. They might like the idea of choosing individual stocks, trading on the foreign exchange market or building a portfolio that includes alternative investments like fractional shares of famous art pieces.
Your Financial Situation and Its Complexity
Look at your current financial situation and consider how complex it is. If you have a lot of assets or you use different asset classes in your investment portfolio, it can help to have a financial advisor look things over. You might even want a wealth manager or investment manager to do the main work of deciding how to invest your money.
How to Build Your Investment Portfolio
Here are the steps to take when creating an investment portfolio:
1. Figure Out the Type of Help You Want
Think about how involved you want to be in the creation and management of your investment portfolio.
If you have access to a 401(k) at work, and you don’t want to do a lot of management on your own, it can make sense to set aside as much as you can from your paycheck and then choose from the stock and bond funds available in your plan.
Perhaps you have questions about reaching your financial goals, including saving for retirement, buying a house and setting aside money for your kids’ college. Maybe you want to consult with a financial planner to help you create a comprehensive plan that includes how to construct your portfolio using various investment accounts for different purposes.
There are a lot of different ways to combine professional advice, robo-advisors and personal investment management to create a portfolio that helps you achieve your various objectives. Think about how you want to proceed, and how much help you want as you put together your financial portfolio.
2. Decide Which Accounts Will Work Best for You
Next, you need to decide which accounts are going to help you create the investment portfolio that meets your needs. You might need a few different accounts, based on various goals.
You’ll have to decide on a mix of tax-advantaged accounts, like retirement and college savings accounts, and taxable accounts like high-yield savings accounts and brokerage accounts.
For goals like saving for a down payment on a house you want to buy in five years, using a high-yield savings account or CD ladder can make sense. On the other hand, you might want to allocate some of your money to a Roth IRA so you can invest for tax-free income during retirement. You can use both of these accounts—and other accounts—in your financial portfolio.
3. Determine the Assets You Want to Include in Your Investment Portfolio
Think about your risk tolerance as you decide which assets to include in your portfolio. Some common assets to include are:
- Stocks: Considered medium-to-high risk. They represent a portion of ownership in a company. For the portion of your portfolio that deals with longer-term goals like college and retirement, stocks can be a reasonable choice.
- Bonds: Considered low-to-medium risk. These are loans to organizations like governments or companies. Returns are usually lower than you see with stocks. But you usually get regular income in the form of interest payments until you get your principal back at the end of the term.
- Mutual funds, index funds and ETFs: Considered low to high risk, depending on the asset mix. Funds represent a collection of investments. For example, some funds invest in a variety of bonds and there are ETFs that attempt to mirror the performance of major stock indexes like the S&P 500.
- Real estate: Considered low to medium risk, although there can be high risk depending on your strategy. You might buy raw land and sit on it in the hopes it will be attractive to a developer later, or you might purchase properties you can rent to others for cash flow, as well as potential appreciation. Other strategies include investing in real estate investment trusts (REITs) or flipping, in which you buy a property, make updates and then sell it at a higher price within a relatively short period of time.
- Alternative investments: Considered high risk. When you buy cryptocurrencies, invest in fractional shares of artwork and collectibles or trade commodity futures, you’re hoping for bigger returns—but taking on a high degree of risk.
Usually, you consider your risk tolerance as you decide on an asset allocation. For example, you might decide to allocate 65% of your portfolio to index ETFs because you want long-term retirement growth. But you might also invest 20% in real estate to capitalize on property and capture potential cash flow in the future. Then you put 10% in municipal bonds and I-bonds for some safety and inflation protection and use the remaining 5% for riskier choices like options trading.
Others might be hands-off and just want someone else to take care of things through a risk-balanced approach, so they get a robo-advisor to give them an 80% stock/20% bond fund split that changes over time.
4. Rebalance as Needed
Finally, review your asset allocation regularly. If you’re young, you might have a split of 90% stocks, 5% bonds and 5% alternatives. But you might decide to change that as you get older.
Other investors might like the idea of having rental properties when they’re younger, but decide to sell the real estate as they get older and don’t want to manage them anymore.
Plus, you also want to make sure your asset allocation remains on track. If stocks have had a great year, they might start to be over-represented in your investment portfolio. You might need to sell some stocks and use the profits to buy more bonds to maintain your strategy.
Frequently Asked Questions
What is the 50/30/20 Investment Portfolio?
Some investment portfolios follow a 50/30/20 asset allocation as a formula to help you choose assets. It breaks down to 50% stocks or stock funds, 30% bonds or bond funds and 20% alternatives like real estate, cryptocurrencies, commodities or other assets.
What is an Aggressive Investment Portfolio?
Investment portfolios are often grouped as aggressive, moderate and conservative. An aggressive portfolio is considered one that has higher-risk assets designed for increased growth. An aggressive long-term goal might include 80% or 90% allocation to stocks while an aggressive short-term goal might include a higher allocation of alternative investments or strategies like options trading or forex futures.
How Much Diversity Do I Need in My Financial Portfolio?
Diversity in your portfolio is generally considered part of a successful strategy. By using different asset classes, you can attempt to offset some losses or augment gains. How much diversity you need depends on your risk tolerance, timeframe and financial goals. At the very least, you might consider having a mix of stocks, bonds and cash.
