When it comes to investing there are many options available to individuals. A person can invest in stocks, bonds, mutual funds, etc. Once a person invests in multiple products their performance needs to be tracked and strategies made to ensure the investor reaps the most profit possible. This is where the investment portfolio comes into play.
What an Investment Portfolio Is
What is an investment portfolio? According to Investor Awareness, it is a term that describes all investments owned. To take this definition a little farther, an investment portfolio is a significant aspect in diversification. Maintaining a diverse portfolio helps to mitigate loss because the investor has not placed all of their eggs in one basket. There are different types of investment portfolios. Perhaps the most common types individuals are exposed to are: Short-Term, Conservative, Balanced and Aggressive Growth.
Short-Term Investment Portfolios
As the name implies, a short-term investment portfolio is made up of short-term investments. Short-term investments tend to be in the form of cash, bonds, money market funds, CDs and treasury bills. These types of investments have low returns and some finance professionals have advocated peer-to-peer lending as a way to diversify a short-term investment portfolio. The idea behind this is that lending to consumers creates a higher rate of return. For the average individual this may not be the best course of action; however, small business owners might want to discuss it over with their portfolio manager to see if this is viable option.
The Conservative Investment Portfolio
The conservative investment portfolio is geared towards preserving capital. A minimal risk investment strategy is used. A great model of a conservative investment portfolio is a sample created by Christine Benz of Morningstar, the portfolio is made up of:
- 70 percent in bonds and cash; 30 percent in stock
- One-third of bond position is in inflation-protected securities
- Six percent in commodities
This type of portfolio is ideal for retirees who are focused more on having assets available than a stream of income from interest. Since the primary goal is to preserve capital, you can dip into your principal to supplement living expenses instead of relying on the portfolio’s earned income.
The Balanced Investment Portfolio
The balanced or moderate investment portfolio is another investment portfolio ideal for retirees. A strategic, rather than tactical, approach is taken with this kind of portfolio. A balanced portfolio will typically invest in bonds for income generation and stocks for investment growth. This combination is to help mitigate significant financial loss should the stock market experience a downturn.
An Aggressive Investment Portfolio
Aggressive investment portfolios are for investors not afraid of high risk. This type of portfolio may incorporate mutual funds that aim for high capital gain, equities, stocks, bonds, cash and maybe some commodities. In the short-term, growth will be very small and some loss will be observed. As a result, aggressive portfolios perform better in the long term - about five years or longer. An actively traded aggressive portfolio will typically garner maximum returns for the investor. The loss factor is why only individuals who are willing to take a high financial risk should seek an aggressive investment portfolio.
These four common types of investment portfolios are best suited for individual investors just starting out and should help you understand “What is an investment portfolio?” It is best to have a portfolio manager or financial analyst manage your portfolio. You can also keep track of you investments with free portfolio management software such as Bloomberg’s Portfolio Manager.
Benz, C. (2009, September 17). A Conservative Model Portfolio for Retirees. Retrieved April 22, 2010, from Morningstar: https://www.morningstar.com/1/3/110175-a-conservative-model-portfolio-retirees.html
Benz, C. (2009, September 24). A Moderate Model Portfolio for Retirees. Retrieved April 22, 2010, from Morningstar: https://www.morningstar.com/1/3/65157-a-moderate-model-portfolio-retirees.html
Lopez, J. C. (2010, March 24). Diversifying Your Short Term Investment Portfolio: Peer to Peer Lending. Retrieved April 23, 2010, from Artipot: https://www.artipot.com/articles/560524/diversifying-your-short-term-investment-portfolio-peer-to-peer-lending.htm
W. E Donoghue & Co., Inc. (2010, March 31). Aggressive Tactical Growth Portfolio. Retrieved April 22, 2010, from W. E Donoghue & Co., Inc.: https://www.donoghue.com/investment-strategies/aggressive-tactical-growth-portfolio
Sample Investment Portfolio. (Supplied by the State of Wyoming; Public Domain)