What Is a Portfolio?

Portfolio is an umbrella term for your investments and other assets. Diversification and risk tolerance should be a factor when building a portfolio.
Jun 9, 2022
What Is a Portfolio?

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You hear the word thrown around all the time: Your uncle keeps talking about his portfolio, your coworker is bemoaning her investment portfolio and your best friend keeps telling you about how they're adding index funds to their portfolio. So what exactly is a portfolio? It's usually an investor's entire group of assets.

Portfolio definition

A portfolio is a person’s or an institution’s entire collection of investments or financial assets, including stocks, bonds, real estate, mutual funds and other securities. A "portfolio" refers to all of your investments — which may not necessarily be housed in one single account.

Outside the financial world, a portfolio can refer to collections of other items — for example, an artist may have a portfolio that showcases their artwork, or a student might have a portfolio that highlights their academic achievements.

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What to consider when building a portfolio

There are a few things to keep in mind when creating a portfolio, including diversification and risk tolerance.

These factors combine to help you determine asset allocation, or what exactly goes into your investment portfolio, and in what amounts. Your asset allocation details what percentage of your portfolio is dedicated to each type of investment.

Diversification is the key to success when investing. Spreading your money around so you’re invested in different companies, industries and geographical regions reduces overall risk by ensuring your portfolio’s performance isn’t too dependent on any one particular asset. For example, if your entire portfolio is invested in one stock, and that stock tanks, your portfolio will likely take a hit as well. If your portfolio holds assets that represent many companies and industries, your portfolio is better built to withstand market turbulence.

Risk tolerance is your willingness to accept investment losses in exchange for the potential of higher returns. In other words, it’s how equipped you are to financially (and emotionally) deal with market volatility. Risk tolerance is partly determined by how close you are to your investment goal: If your goal is far away, you have a long time to ride out the highs and lows of the stock market and can invest in aggressive investments like stocks or stock mutual funds. If your goal is in the next five years, you likely would take less risk because you won’t have time to rebound from market losses.

What’s included in a portfolio

A portfolio is made up of investment accounts and the specific investments within those accounts. Here are some of the accounts and investments that are considered part of your portfolio.

Investment accounts

You may have multiple accounts that hold various investments aimed at different purposes — for example, a 401(k) for retirement and a brokerage account for dabbling in stock trading. But think of your investment portfolio as an umbrella term for all of your investment accounts, including:

  • A 401(k) or another employer-sponsored retirement plan.

  • An individual retirement account.

  • A taxable brokerage account.

  • An account with a robo-advisor.

  • Cash held in savings accounts, money market accounts or invested in certificates of deposit.

  • Peer-to-peer lending accounts.

Specific investments

Here are a few types of investments you’ll commonly find in a portfolio, as well as how much risk they tend to carry.

Stocks: Stocks give individuals a share of ownership in a company. Buying individual stocks comes with a lot of risk, but historically stocks have provided the highest average rate of return. Learn more about how to buy stocks.

Bonds: Bonds are loans used by a company or government to borrow money from an investor. Bonds are less risky than stocks, though some still carry the risk that the borrower may default on their loan. Learn about how to buy bonds.

Mutual funds: Mutual funds allow you to invest in many stocks, bonds or other investments all at once, giving your portfolio instant diversification. This diversification makes mutual funds less risky than individual stocks, but the risk level is determined in part by how risky the components are. All mutual funds have some degree of risk. Learn more about how to invest in mutual funds.

Real estate: Publicly traded real estate investment trusts are companies or associations that own (and sometimes manage) real estate, like apartment buildings or commercial properties. You can also invest in nontraded REITS through an online real estate investing platform like Fundrise. Publicly traded REITs can be bought and sold at will, while nontraded REITs are illiquid, meaning you may not be able to sell them at any time.

4 common types of portfolios

There are lots of different types of portfolios, but here are a few common ones. To create your ideal portfolio, you may end up blending some of the following styles. For example, you can have an aggressive portfolio that exclusively holds socially responsible investments.

Aggressive portfolios are for those with a high risk tolerance, such as someone who is young with a long time horizon before retirement or another long-term goal. An aggressive portfolio may hold mostly stocks, and may include newer companies with a less-proven track record. These companies may perform well, leading to bigger gains, but they can also perform poorly or even go out of business.

Defensive portfolios are essentially the opposite of aggressive portfolios. Sometimes called conservative portfolios, defensive portfolios are for investors with a low risk tolerance, such as someone heading into retirement or investing for a short-term goal. Defensive portfolios may contain more bonds than stocks, and often contain mutual funds that focus on sectors that do well in volatile markets like consumer staples.

Income portfolios focus on assets that produce income, such as bonds and dividend-paying stocks. These kinds of investments usually pay investors at regular intervals, such as quarterly or biannually. These portfolios are typically a good fit for retirees who rely on their investments for income when they stop working. And as great as it sounds to have your investments routinely write you a check, you’ll likely need to pay taxes on those dividends.

Socially responsible portfolios are predominantly built using funds that consider ESG (environmental, social and governance) factors. For instance, you could create an environmentally-conscious portfolio out of funds that invest in green energy. Socially responsible investing can help you build a portfolio that not only generates returns, but also benefits a worthy cause.

How to start a portfolio

You’ll need a brokerage account first. Check out our full list of the best online brokers to compare options.

» Creating a DIY portfolio? Learn how to build an investment portfolio.

If picking your own investments doesn’t interest you, you can invest with the help of a robo-advisor or financial advisor. Robo-advisors use computer algorithms to create and manage a personalized portfolio for you, often for far less than the cost of working with a traditional advisor. We have compiled a list of top-rated robo-advisors.

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