Investors have portfolios. But what exactly is a portfolio, anyway?
Your portfolio is a distinct expression of who you are. It should be tailor-made to fit your financial goals and risk tolerance.
The word portfolio is used to describe the investments you hold such as stocks, bonds and cash.
The mix of investments in your portfolio is the portfolio’s asset allocation. Say you have $6,000 in stocks and $4,000 in bonds. Your $10,000 portfolio has a 60/40 asset allocation, 60% in stocks and 40% in bonds.
There are a few ways to look at your portfolio’s asset allocation. But historically, the best approach for individual investors has been one that’s well-balanced and diversified across a broad array of stocks, bonds, and cash.
The key is to match your portfolio to your time horizon, financial requirements, and the amount of investment risk you can tolerate. By doing this, you’re balancing risk and reward for optimal long-term growth.
Portfolios are Dynamic, not Static
The one you create when you’re 25 is not the same as the one you have when you’re 50.
Younger investors starting to save for retirement might choose to weight their portfolio toward stocks.
Although stocks generally have more volatile returns than bonds or cash, younger investors have the luxury of time in the face of market volatility. When you’re older, you may want to invest more conservatively and shift more heavily toward bonds and cash.
There is no “one-size-fits-all” when it comes to your portfolio and the ideal asset allocation will change over time.
Your Portfolio is You
To sum up, there are three important points to remember:
- Your portfolio simply refers to your investments (stocks, bonds, cash)
- Your percentage mix of stocks, bonds, and cash is called asset allocation
- The right asset allocation for your portfolio depends on your goals and tolerance for risk.