Like any industry, investing has its own language. And one term people often use without really explaining it is “investment portfolio.”
Think of an investment portfolio as the keeper of all your investments. Just as you might use a safe to store important documents, your investment portfolio stores all the assets you own — stocks, bonds, mutual funds, exchange-traded funds and so on. But unlike a safe, an investment portfolio is more of a concept than a physical item.
But understanding what an investment portfolio is doesn’t tell you much about how to build one. Here’s what you need to know.
What’s included in an investment portfolio
You may have multiple accounts with various financial investments in them but use them for different purposes — a 401(k) for retirement versus a brokerage account for dabbling in stock trading, for example. But think of your investment portfolio as an umbrella term for all of your investments in the following types of accounts:
- A 401(k) or another employer-sponsored plan.
- An individual retirement account.
- A self-directed, 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.
While you may think of other things as investments (your home, cars or art, for example), those aren’t considered part of an investment portfolio. Rather, we’re talking the following types of assets. Click on any of them to learn more:
- Exchange-traded funds.
- Mutual funds.
- Target-date retirement funds.
- Real estate investment trusts.
- Alternative investments.
- Short-term investments.
- Employee stock options.
How to build a good investment portfolio
Diversification is the key to success when investing. Spreading your money around reduces overall risk by ensuring your portfolio’s performance isn’t too dependent on any one particular asset.
But diversification doesn’t mean you have to tread into exotic assets. Instead, we recommend using low-cost index funds (mutual funds or ETFs) for the bulk of your portfolio’s investments. That’s because these funds track broad indexes such as the S&P 500 and offer an easy way to achieve that all-important diversification cheaply.
» Get started: How to invest in index funds
Diversification also means investing in different assets that aren’t highly correlated, meaning they don’t move in lockstep. Stocks and bonds have had a negative correlation since the 1990s, so when stock prices have gone up, bond prices have gone down and vice versa.
You may have heard recommendations about how much money to allocate to stocks versus bonds. Commonly cited rules of thumb suggest subtracting your age from 100 or 110 to decide how your portfolio should be invested. If you’re 30, these rules suggest 70%-80% of your portfolio allocated to stocks and 20%-30% of your portfolio to bonds. In your 60s, that mix shifts to 40%-50% allocated to bonds and 50%-60% to stocks.
Some people still like that rule of thumb, but others find it to be too simplistic because it ignores your individual risk tolerance. Whatever mix of stocks and bonds you decide is right for your portfolio, such diversification can be achieved using the low-cost index funds mentioned above. You don’t need to wade into the world of individual stocks or bonds if you don’t want to.
Finally, if all this feels like more than you want to decide, a portfolio management service called a robo-advisor will make all these allocation decisions for you. After you answer a few questions about your investing goals and risk tolerance, these automated investing services will build and manage your portfolio for a relatively low cost. (Read more about robo-advisors to see if one’s right for you.)
Have some fun with your portfolio
Some people are content with a set-it-and-forget-it investing strategy, while others prefer a hands-on approach. Either way, we recommend prioritizing low-cost index funds for a majority of your investment portfolio. Even professional investors who pick stocks for a living often use these funds for their personal investments.
Unless you plan to devote a lot of time tracking the market, we recommend that you keep more risky bets (trading stocks, options, futures or other assets) to no more than 10% of your portfolio’s value. Why? Again, you want to protect your nest egg in case a “sure bet” turns out to be a loser.