What is an investment portfolio?
A personal investment portfolio is an assortment of assets that could include stocks, exchange traded funds (ETFs), bonds, and potentially some other assets.
An investment portfolio is created based on an investor’s risk tolerance and goals. If an investor is risk adverse, or risky happy to take a risk, this is reflected in assets they hold in the portfolio. Portfolio diversification is the cornerstone of investing. With diversification, if one single investment performs poorly, it has minimal impact on the overall value of the portfolio.
What are the benefits of an investment portfolio?
There are a number of benefits to having an investment portfolio:
Potential for long-term growth, helping to achieve financial goals or retirement goals.
Potential to outpace inflation so savings don’t lose buying power over time.
Personalised risk/reward profile based on individual risk tolerance and objectives.
A portfolio provides diversification and exposure to multiple assets and stocks, not just a few. Diversification can help to decrease volatility.
Steps for making an investment portfolio
1. Understand your risk tolerance
Risk tolerance is the level of risk you are comfortable with, and how you are likely to react to risk/volatility.
More volatile assets tend to produce higher returns, but aren’t ideal for someone who doesn’t like seeing their portfolio fluctuate wildly. Ideally, you may want enough risk to get the highest returns possible, while also keeping volatility low enough that you can feel at peace with the movements (up and down) that occur. If you can’t sleep because of your investments, they may be too risky for your personal tolerance.
Consider what your risk tolerance is. Do you prefer a more stable portfolio, possibly sacrificing a higher return? Or are you willing to see bigger swings in your portfolio in exchange for higher returns? Knowing this will help you to decide what investments to make later in the process.
