Financial Jargon Busting What is a portfolio?

Those seeking to learn more about investing might find themselves repeatedly coming across the word portfolio and wondering, “What is a portfolio?” In the simplest terms, a portfolio is a collection of investments that often includes assets like stocks, bonds, cash and others.

It’s common to invest in different asset types like stocks, bonds and commodities, but all these things combined make up your portfolio. Investors often view their investments as a whole via their portfolio to track their progress. Let’s get into the different types of portfolios and go over how to build and manage a successful collection of investments.

Types of portfolios

When it comes to investment strategy, there is no one-size-fits-all. Therefore, it’s helpful to be aware of some different types of portfolios within investing that can help add diversification to your investments.

• Conservative: A conservative portfolio is designed to help minimize risk and preserve the principal investment, even if that means potentially lower returns than more aggressive strategies. Conservative portfolios are often heavily invested in lower-risk assets like bonds and money market funds, though these portfolios may still hold some blue-chip dividend stocks and other securities. These portfolios are often suited to investors nearing retirement, or those with a lower risk tolerance, since they can help to potentially protect against downside risk.¹
• Aggressive: If you have an aggressive portfolio, it simply means that you’re willing to take more risk with your investments. You are more willing to invest your money in higher-risk assets that could either earn a lot at times or lose a lot at times. While it’s often recommended that younger people invest more aggressively since they have more time to recover from any serious losses, it’s less about age per se and more about how soon you’ll need the money to meet your goals. For example, older investors might skew toward more conservative assets to potentially generate income during retirement. However, you should always invest the way that best meets your risk tolerance and time horizon in order to meet your financial goals.
• Speculative: A speculative portfolio is a high-risk approach in which the investor tries to take advantage of the price movements of an asset. Speculative investors don't purchase assets for their long-term value but to sell them at some point in the near or distant future to make a profit. Speculative investments could include real estate, stocks, currencies, commodity futures and even things like fine art or collectibles.
• Hybrid: A hybrid portfolio offers diversification to an investor and is typically a relatively fixed proportion of equities and fixed income. This means that your money isn’t invested in one place or one asset class, but it is spread across multiple types of investments. The benefit of this diversification is that, if one type of asset takes a hit, your entire portfolio doesn’t necessarily plunge as a result.

Making yourself familiar with different types of portfolios is a great way to ensure that your portfolio will work the best for you.

How to build a portfolio

Once you’ve determined the type of portfolio you want to build, it’s time to start putting your money to work. Building your portfolio can be done on your own or by working with a financial advisor. If you choose to do it on your own, here are some general steps to follow:

• Open an account: You can open a brokerage account online or in person. If you want to work on your own, you can do it online. If you want to work in person with a financial advisor, you can open an account in person at a financial institution.
• Fund the account: Once the account is open, you need to fund it. You can transfer money into the account in a variety of ways, like an electronic funds transfer, wire transfer or even a check.
• Invest your money: Start investing the money you’ve transferred into your brokerage account. You can start purchasing different types of securities like stocks or bonds, depending on the type of portfolio you’ve decided to put together.

What is portfolio diversification?

One of the key factors to having an investment portfolio is diversification. As mentioned earlier, diversification means that your money is invested across different types of securities. For example, you don’t invest all your money in one stock, because if that stock crashes, your entire portfolio collapses along with it. In fact, it’s often recommended that you don’t even put your money solely in one asset class (for example, just stocks) – instead, it’s generally better to spread your investments across different types of securities.

This approach is important because it can help protect your money. If you have money invested in several asset classes like bonds, stocks and commodities, for example, and then the bond market falls, only part of your investment portfolio experiences that loss, but not all of it. Here are some different types of securities and strategies to consider to help you diversify your portfolio:

• Mutual funds
• Exchange-traded funds (ETFs)
• Spreading your money across different asset classes like stocks, bonds, commodities, cash and more²

What is asset allocation?

Asset allocation is another factor when building an investment portfolio. Asset allocation is the process of deciding how to allocate your money when investing – where will the money go, and how much of it will you put in different areas?

Asset allocation is extremely important because how your money is invested has a great deal to do with how the investments perform. You allocate your assets according to your personal investing strategy and long-term goals. For example, if you don’t want to take a lot of risks with your money, you might allocate your assets in low-risk investments like money market accounts. But if you are comfortable taking more risks with your money with the chance for a higher reward, you might allocate your assets in higher-risk investments like currency trading or real estate investments trusts (REITs).³ Before making an investment decision, consider discussing with a financial advisor.

Real assets can potentially hedge against resurgent inflation

Our strategists believe inflation is likely to remain below 3% over the next few years. However, they acknowledge risks to their view. Inflation could reaccelerate, perhaps in the wake of an unexpected geopolitical shock or a substantial increase in tariffs. If inflation does exceed expectations, bonds may struggle to act as a buffer in multi-asset portfolios. In this scenario, investors can find potential inflation defense in real assets, or the more “real-asset-like” sectors of the equity market.

Investment portfolio example

Let’s look at some examples of different types of portfolios to put things in perspective.

A conservative (i.e., low-risk) portfolio might look like this:

• 60%–65% fixed-income securities
• 25%–30% equities
• 5%–15% cash or cash equivalents

A moderately aggressive (i.e., medium-risk) portfolio might look like this:

• 50%–55% equities
• 35%–40% fixed-income securities
• 5%–10% cash or cash equivalents

A very aggressive (i.e., high-risk) portfolio might look like this:

• 80%–100% equities
• 0%–10% fixed-income securities
• 0%–10% cash or cash equivalents

These examples are purely for illustrative purposes. Investing involves market risk. When considering your portfolio, you should take into account your time horizon and risk tolerance.

What is a portfolio manager?

A portfolio manager helps investors manage their assets and their portfolio. For many people, working with a portfolio manager is a great way to ensure that their investments are being handled by someone with expertise.

If you’re new to investing, it’s a good idea to work with a financial advisor so that a professional who is trained in portfolio management can help guide your investments. A financial advisor is always willing to help you get started on your investment journey.

The bottom line

Hopefully, you’re no longer wondering, “What is a portfolio?” Or perhaps you’re wondering, “How soon can I start building my portfolio?” The answer is now! You can open a brokerage account today, connect with a broker or connect with a financial advisor to learn more about investing products.

Now that you better understand what a portfolio is, as well as the different types of portfolios out there and the different ways you can build yours, it’s time to start investing.