What is an investment portfolio? Definition and how to build one (2024)

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• Investment portfolios an accumulation of different investable assets owned by an individual or institution.
• Create a personalized investment portfolio to meet your investment goals by considering your age, risk tolerance, and time horizon.
• The first step in creating an investment portfolio is opening a brokerage account with an online investment platform or traditional in-person brokerage.

The term "portfolio" often refers to a collection of works or a record of documents related to a subject, like a work portfolio, art portfolio, or writer's portfolio. But what exactly is an investment portfolio?

Unlike other kinds of portfolios, investment portfolios (sometimes referred to as stock portfolios) aren't physical collections. If you currently own stock or contribute to a retirement saving plan, you've already started creating an investment portfolio.

What is a portfolio?

An investment portfolio is an accumulation of stocks, bonds, and other assets owned by an individual or institution. Portfolios refer toallof your investments. In fact, your investment portfolio may span across multiple accounts, including:

• Individual or joint brokerage account
• 401(k), IRAs, or other retirement plans
• Custodial account or 529 plan
• Money market account
• Peer-to-peer lending account

The kind of account you open will largely depend on your goals. Although the aim of any given investment portfolio varies from person to person, it generally revolves around generating interest and increasing financial gains.

Common assets held in an investment portfolio include:

• Stocks
• Bonds
• ETFs
• Mutual funds
• Cryptocurrencies
• Real-estate properties and REITs
• Commodities (aka physical metals, energies, agricultural products)

The assets available in your account are limited by your account type and the brokerage/investment platform you're investing through. Ensure that the account/platform offers the investment options you want before signing up.

Building an investment portfolio

1. Set goals and time horizon

What are you looking to achieve? The key to creating a successful investment portfolio is to set clear and realistic goals to work toward.

"The first step in constructing a portfolio is defining an investor's goals for their assets. This can be impacted by their risk tolerance, what sector they want to invest in, and region exposure, "says Nathan Wallace, principal wealth manager at Savvy Advisors. "These different factors are the building blocks for determining the types of investments that will be used and how to combine them."

Investable assets like stocks and ETFs have varyinglifespans and wealth-building capabilities. Therefore, certain investments may be better suited for you depending on your age, goals, how long you wish to invest, and current financial situation.

For example, investors nearing retirement age tend to invest in less riskyassets as there isn't as much time to recover from a failed investment. Less volatile investment options include ETFs, bonds, and other fixed-rate securities.

Likewise, younger investors can get more out of long-term investing strategies — such as buying index funds or real-estate properties — as investors in their 20s or 30s have more time to recover from the potential downfall of a riskier investment.

"There is no correct portfolio for beginning investors, as often new entrants to the market (especially if they are young) will be best served by a higher-risk portfolio given the relationship between risk and return," Wallace explains. "That said, from a psychological perspective, high-risk portfolios can take a toll as investors will have to deal with more volatility and the possibility of larger drawdowns."

2. Determine your portfolio risk tolerance

Risk tolerance is another major factor in determining which securities should be included in your investment portfolio. Sure, all investments come with some level of risk. However, some investments, like crypto or individual stocks, tend to be more volatile.

• Conservative:Best for cautious beginners, older investors, and short-term goals. Conservative investment portfolios largely invest in bonds, mutual funds, and other fixed-income securities. Keep in mind that lower-risk investments, like bonds, often produce smaller returns.
• Aggressive:High-risk individuals with long-term investment goals, or younger investors with time on their side build aggressive portfolios that are a blend of volatile stocks and other risky securities, like cryptocurrencies. It's a popular choice for younger investors as they have the time to recover from potential market losses.
• Moderate:Essentially, it's the best of both worlds. A moderate investment portfolioincludes both low-risk and high-risk securities so you can get exposure to the market without risking all of your money. It's not always a cut-and-dry 50/50 stock and bond allocation. Depending on your goals and preferences, your portfolio may be 40% bonds and 60% or something similar.

3. Decide how involved you want to be

There are two main investing strategies: passive and active. Passive investing, or hands-off investing, is best for beginners and folks who would rather have their portfolios managed for them. Robo-advisors are low-cost, automated brokerage accounts that use algorithms to invest, monitor, and rebalance your investment portfolios to match your preferences.

Hands-off investors may also choose to have a professionally managed account. This means that a financial expert or team of experts, usually a CFP or similar accreditation, buys and sells securities for you. However, professionally managed brokerage accounts tend to have much higher minimums and fees.

If you'd rather pick and choose your investments, you're likely an active (aka hands-on) trader. Your portfolio is completely in your control, so only experienced investors who are willing and able to put in the time and energy to hand-pick their investments should open a self-directed investment account.

4. Diversify your portfolio

Diversification reduces your portfolio's overall risk. Putting all your eggs in one basket — such as buying stock in one company — isn't advised as it leaves you vulnerable to the volatile nature of the market.

"The goals of diversification are twofold: to reduce the risk and volatility of a portfolio while at the same time increasing risk-adjusted return," says Wallace. "Beginning investors can begin to diversify their portfolios by investing across asset classes, sectors, and uncorrelated securities."

You can easily diversify your portfolio by investing in multiple kinds ofassets and getting exposure to different sectors in the market. That way, if one of your investments significantly drops in value, you won't lose all of your money.

One of the easiest ways to diversify your portfolio is by investing in exchange-traded funds (ETFs) or mutual funds. Both are made up of various securities like stocks and bonds. ETFs are generally less expensive to invest in than mutual funds, whichtend to require higher minimums and fees.

4. Manage and rebalance as needed

You've started creating a portfolio as soon as you start investing your money, but you'll need to be diligent about evaluating the status of your investments and make sure your portfolio is on track to meet your investment goals.

"Investors should review their portfolios periodically," Wallace says. "Each review should cover a review of the positions in the portfolio to assess whether the initial reasoning for purchasing a particular security still holds, and a review of the financial market and economic conditions and how changes to each impact the investor's portfolio."

How frequently you need to rebalance your portfolio depends largely on your investment strategy and time horizon. Long-term investments, like retirement savings plans, can be managed by a professional or robo-advisor and likely won't require as much attention. Hands-on traders, however, will need to keep a closer eye on their investments.

Investment portfolio — Frequently asked questions (FAQs)

How do you create an investment portfolio?

Creating an investment portfolio is actually quite simple. Once you open a brokerage account with a traditional broker-firm, online investment platform, or other institution, you can start developing your portfolio and meeting your investment goals. If you don't already have a financial plan in place, that's likely the best place to start.

Remember that your portfolio isn't tied to one account or investment type. One of the best ways to reduce your investment portfolio's exposure to risk and volatility is by diversifying your assets across multiple kinds of investments.

Certified financial advisors (CFPs) and financial planners can help investors create an investment portfolio or manage an existing one. Automated investing platforms like robo-advisors are great tools for beginners and passive investors to build customized portfolios.