Money is a tool that, if used wisely, can help you meet your needs and enjoy life to the fullest. Choosing the right investment portfolio is an important step toward that end.
An investment portfolio is your particular mix of assets and usually includes stocks, bonds and other securities. Your portfolio and its asset allocation affect your investment returns, though the returns aren't the primary purpose of a portfolio. Your money should work to support your goals, so your portfolio works best when it's designed to help you achieve them, not just chase returns.
Read on to learn more about portfolio components and how to invest in a way that supports your desired outcomes.
What is an investment portfolio?
Your investment portfolio is your investments viewed together as a whole rather than individual parts. Broadly speaking, your portfolio is every investment asset including cash, stocks, bonds, mutual funds and exchange-traded funds (ETFs) you hold in your retirement and brokerage accounts.
Here's a closer look at each of those components:
You may not think of the cash you have on hand or hold in deposit and transactional accounts as an investment, but it can be an important part of your portfolio. It gives you the stability and liquidity to meet your immediate and short-term financial needs.
- Savings accounts
- Checking accounts
- High-yield savings accounts
- Money market accounts.
Depending on how much liquidity you need, short term bonds or
Mutual funds & exchange-traded funds (ETFs)
What to consider before assembling an investment portfolio
Reflect on what you want your money to do for you before you decide how to invest it. Simply growing your money is rarely the ultimate purpose of investing—if it were, every investor might choose the most aggressive allocations. There's more to it than that.
Before choosing your portfolio investments and allocations, it's important to do some prep work. Also, keep in mind that choosing an investment portfolio isn't a set-it-and-forget-it activity. You need to monitor your portfolio and occasionally review your objectives to make sure your investments continue working for you. Things to consider as you get started:
Choose your investment objectives
Just like you need to identify a destination before planning a route, you need to know the target for your investments. For example, you may want the ability to withdraw $5,000 per month from your savings when you retire, or you may want to save up enough to pay for your grandkid's college.
Place your goals on a timeline
This is called your time horizon. The longer your horizon is, the more aggressive your portfolio can be. If you need the money soon, you may want a more conservative and stable portfolio.
Estimate your risk tolerance
Some investors are comfortable with the chance of large drops in their portfolio as long as they have time to recover and earn higher returns over time. Other investors may not be willing to take that chance. Your portfolio choice impacts how volatile your account's value is, so know your
Keep diversification & allocations in mind
You'll need to periodically rebalance your portfolio as investment values shift as well. Although you may maintain the same target allocation for a long time, a 60% stock portfolio could easily become a 70% stock portfolio in a strong bull market.
What's your investing style?
What is asset allocation & why does it matter?
The description of your asset allocation reflects where it falls in the range between conservative and aggressive investing. It plays a large role in how much
These are the main categories of asset allocations:
Conservative: Focus on income and stability
Conservative asset allocations tend to have more bonds and cash, often no less than 70%. Portfolios with these allocations also may be referred to as income portfolios because they can be stable and produce consistent interest income. They have very little volatility but also a lower average return than more aggressive portfolios. Investors with very short time horizons or low risk tolerance might choose a conservative portfolio.
Moderate: Maintain slow & steady growth
These asset allocations generally have 40% to 60% invested in stocks. They likely have a higher return and fluctuate more than conservative allocations but not as much as aggressive allocations. The classic retiree portfolio is 60% stocks and 40% bonds and cash.
Aggressive: Take on more risk with the potential for more reward
Aggressive asset allocations have higher stock holdings, typically 70% and higher. The long-term returns can be quite high but also volatile. Investors who are younger, have a higher risk tolerance or have a greater ability to take risks may benefit from an aggressive allocation.
Get help with your investment portfolio
Figuring out the right investment portfolio for you doesn't have to be stressful. Start by reviewing your personal financial goals and a timeline for when you hope to achieve them. Next, reflect on your risk tolerance to determine the amount of volatility you're willing to accept. Putting it all together and selecting an asset allocation that's right for you is the last step before opening an account and investing your money.
Sometimes a little guidance makes a big difference.