Notably, one of the most fundamental ideas in investing and finance is the portfolio. It is a concept with several meanings depending on the circumstances. O’Connell (2022) states that a portfolio, in its most basic form, is an accumulation of assets, such as bonds, stocks, real estate, or even cryptocurrencies, controlled by a single person or institution. The stocks and exchange-traded funds (ETFs) that people possess in a brokerage account are referred to as their taxable investment portfolio O’Connell (2022). Additionally, portfolios are groups of assets held by enterprises or managed by financial firms. One of the fundamental duties of investing is portfolio creation and management. The objective of an investment portfolio is to accumulate wealth over time. Considering risk tolerance, diversifying assets, and learning to adjust asset allocation are all basic tenets for managing an investment portfolio.
The percentage of bonds and stocks may define types of portfolios. Bonds, for instance, are loans to firms or governments that are repaid over time with interest. Benson and Jackson (2021) claim that bonds are considered safer investments than stocks, although their returns are often smaller. Moreover, bonds having a set return rate might help balance out riskier investments like equities in an investor’s portfolio. Stocks are a small portion of a company’s ownership. Investors purchase stocks that they anticipate will grow in value over time (Benson & Jackson, 2021). The risk is that the stock will either not rise or fall in value. Many investors buy equities using index funds, mutual funds, or ETFs to help lessen that risk. A defensive portfolio includes 70 percent bonds and 30 percent stocks, whereas an aggressive one equals 15 percent bonds and 85 percent stocks (Benson & Jackson, 2021). Consequently, a moderate portfolio is more balanced and has 40 percent bonds and 60 percent stocks.
A conservative portfolio, also known as a defensive portfolio, keeps risk low to protect investment money by investing in bond funds and dividend-paying companies. O’Connell (2022) acknowledges that defensive portfolios are popular among older investors who are nearing or have retired and would not want to jeopardize their capital. A capital appreciation portfolio is another name for an aggressive portfolio. Aggressive portfolios are suitable for younger or risk-tolerant individuals that wish to develop their assets fast and are willing to take risks (O’Connell, 2022). They often contain more volatile investments such as growth stocks, which are shares of quickly developing firms that may not yet be profitable. Benson and Jackson (2021) argue that an aggressive portfolio is preferable for someone with low-risk tolerance and a lot of time to invest. In contrast, a defensive strategy is better for someone with high-risk patience and a lot of time to spend.
The moderate risk portfolio is suitable for investors with average risk tolerance. Benson and Jackson (2021) mention that some advisors suggest rebalancing at predefined periods, such as every six or twelve months, or when the allocation of one of the asset classes varies by more than a preset proportion, such as 5 percent. For instance, if an investor had a 60 percent stock allocation in their investment portfolio and it climbed to 65 percent, it is advised that the person liquidate some of the stocks or invest in other asset classes until the stock proportion returns to 60 percent.
References
Benson, A., & Jackson, A-L. (2021). Investment portfolio: What it is and how to build a good one? NerdWallet. Web.
O’Connell, B. (2022). What is a portfolio? Forbes Advisor. Web.