Piggyback off insights from fund managers, research analysts and financial journalists
Find out more

How A Portfolio Works

A guide to portfolio building, the various types, and what to keep in mind

How A Portfolio Works

Defining a portfolio

A portfolio is a general term that can apply to any financial asset, such as gold or real estate, but it is most frequently used to refer to the total of all of your income-producing assets. The "holdings" or "portfolio" of an investor can be any assortment of stocks, bonds, money and money equivalents, commodities, and other assets.

Although there are other possibilities, some persons and organizations manage their own investment portfolios. Many people decide to have their portfolios managed on their behalf by a financial advisor or other financial experts.

Why is a portfolio important?

You could question if you actually need an investment portfolio if you don't already have one. After all, isn't investing in stocks risky?

In a 2020 Gallup poll, only 55% of Americans said they owned stocks. Over the last ten years, this number has stayed quite constant. The survey also revealed that over half of those who responded (48%) believed it would be a terrible idea to invest an extra $1,000 in the market, while the other half (49%) believed it would be a good one.

Naturally, there are a variety of reasons why people could delay developing a portfolio. They might require cash to cover other expenses, such as daily necessities. Or they might think the market is extremely hazardous. They might even be hesitant to invest because of the steep learning curve. Despite the validity of these worries, beginning an investment portfolio is one of the finest methods to increase your wealth and achieve important financial milestones, particularly a safe retirement.

Understanding portfolios

You might already have a retirement account through your workplace, which serves as your investing portfolio. Some people could actively acquire and sell assets in their portfolios with the intention of making a quick profit. Some investors have intermediate goals in mind, like purchasing a home. Some people have numerous portfolios with a variety of objectives in mind.

Portfolios for investments come in a variety of forms. Each category is associated with a certain investing objective or approach as well as a level of risk tolerance.

Gaining Portfolio

A growth portfolio usually referred to as an aggressive portfolio, entails assuming more financial risk in the hope of earning a higher return. Instead of older, more established organizations with a track record of success, many growth investors favor startups with funding needs and room to expand (and less room to grow).

Growth portfolio owners are prepared to deal with short-term changes in the underlying value of their investments if it increases the likelihood of long-term capital gains. If you have a high-risk tolerance or wish to invest for the long term, this sort of portfolio is perfect for you.

Earnings Portfolio

Building an income portfolio with an emphasis on generating ongoing passive income is common. Investors look for investments that give consistent dividends with little risk to the underlying assets that generate those dividends rather than those that might produce the most long-term capital gain. If you want to invest with a short- to medium-term time horizon or are risk-averse, this sort of portfolio is suitable for you.

Portfolio of Value

Value stocks, or stocks with a low price in relation to the company's total financial situation, make up a value portfolio. Value buyers purchase these undervalued equities and hold them while their value increases.

Investors with a value portfolio purchase stocks with the intention of holding them for a long time in order to achieve long-term growth rather than concentrating on income-generating stocks. If you have a lengthy time horizon and a moderate risk tolerance, this style of portfolio is suitable for you.

Safeguarded Portfolio

In spite of changes in the larger market, a defensive stock is one with comparatively low volatility in an industry or sector that tends to remain largely steady. Defensive stocks, then, are companies whose goods are consistently in demand, regardless of the status of the economy.

Low-volatility equities make up a defensive portfolio, which is designed to prevent losses during a downturn in the market. Risk and potential returns are frequently lower in defensive strategies. These portfolios do better over the long term because they produce slower but more consistent growth.

Optimal Portfolio

One of the choices that investors utilize the most frequently is a balanced portfolio. This kind of portfolio's goal is to lower volatility. It mostly consists of income-producing, moderate-growth companies, together with a sizable amount of bonds. No matter which way the market is moving, a mix of stocks and bonds can help you lower your risk. A person with a low to moderate risk tolerance and a long-term time horizon should use this type of portfolio.

Steps to build a perfect portfolio

1. Select a management style: DIY or professional

Some people are hesitant to start investing because they don't fully comprehend the process. There are various choices available for folks who don't feel confident handling their own portfolio. How you want to handle your portfolio will be one of your first choices when you construct it. Several choices consist of:

  • Self-management of a portfolio
  • the use of a Robo advisor
  • engaging a money manager or financial advisor

2. Consider your time frame

The period of time you anticipate needing the money you invest is known as your time horizon. Your time horizon is 30 years if you are saving for a retirement that is about 30 years away. In general, experts advise lowering your portfolio's risk as your time horizon gets shorter.

If you're in your 20s and preparing for retirement, for instance, you can have a growth portfolio that is primarily stock-based. However, as you get closer to retirement age, you might change your portfolio to include more low-risk assets, such as government bonds. If you want to conserve your cash while earning income after retirement, you can choose an income portfolio.

3. Determine your tolerance for risk

Everyone's tolerance for danger varies. Others prefer the comfort of knowing their money will be there when they need it, but some find the excitement of taking a risk in investing. Your choice of how to construct your portfolio is greatly influenced by your level of risk tolerance.

An investor who is more risk-averse might decide to remain with investments like bonds and index funds. However, a person with a higher risk tolerance can consider mutual funds with tiny capitalizations, individual stocks, and real estate.

4. Put an emphasis on diversity

Diversifying your portfolio is an efficient strategy for limiting losses. This means that if one item performs poorly, your portfolio as a whole won't be affected. You can diversify both inside and between different types of assets. You may, for instance, allocate your funds among several asset classes such as equities, bonds, commodities, and real estate.

Diversification within a single asset class is another option. To attain a healthy mix, could actually entail investing in an index fund that owns stocks from many industries.

5. Rebalance as necessary

Rebalancing involves changing your assets in order to return to your initial asset allocation. Some of your investments will grow faster than others, which may cause them to start consuming more of your portfolio. You might need to sell some assets (those that have had growth) and acquire more of other assets (those that haven't experienced the same amount of growth or have declined in value) in order to preserve your desired asset allocation.

Savings account vs. Investment portfolio – What's the difference?

The terms "saving" and "investment" are sometimes used interchangeably. For instance, we might refer to investing for retirement when really, we mean saving for retirement via a 401(k).

Additionally, saving and investing are two quite different approaches, even while your savings account is theoretically a part of your overall portfolio.


  • Done in a brokerage account
  • Some risk of financial loss
  • Higher potential return
  • Best for long-time horizons for 3 to 5 years or longer
  • Protects against inflation


  • Done in a bank or credit union account
  • Risk-free as long as the bank is FDIC-insured
  • Little to no potential return
  • Best for short time horizons
  • Does not protect against inflation

Savings accounts and other low-risk investments are essential components of a well-diversified portfolio.

Factors to consider when building an investment portfolio

One of the fundamental steps in investing is creating and managing a portfolio; the objective of an investment portfolio is always to increase your wealth over time.

According to Karyn Cavanaugh, a financial advisor at Carolinas Wealth Management, "Investment portfolios are excellent for anyone who wishes to expand their income or financial nest egg in the pursuit of a financial objective," like paying for college, purchasing a home, or funding retirement.

Portfolios contain all kinds of assets used for investing. Financial experts typically refer to a portfolio of stocks and bonds, but many consumers also create portfolios to invest in other asset classes, such as gold, real estate, or cryptocurrency.

Understanding your risk tolerance, diversifying your assets, and learning to adjust your asset allocation are important ideas for managing an investment portfolio.

Risk Acceptance

Risk tolerance is the degree to which you are willing to accept the possibility of financial loss in the quest for higher returns. That seems good in theory, but determining your own risk tolerance can be challenging before investing any money.

If you're just beginning your investment career, follow this general guideline: When you are further away from your goal, engage in riskier stock-related strategies (either individual stocks or funds); when you are closer to your goal, engage in more conservative bond-related strategies (or even cash).

Here is how that would function in real life. For long-term objectives, such as retirement or your child's college education, you would want a portfolio with a higher concentration of riskier assets, and for short-term objectives, such as a trip you're planning for next year, you would want a portfolio with more stable fixed income assets.

How you construct your portfolio should be determined by your individual risk tolerance. Even though retirement is decades away, it may be useful to adopt a more conservative mix of investments if you won't be able to sleep at night because your retirement portfolio contains primarily stock funds.


Even though it sounds cliche, you shouldn't put all of your eggs in one basket, particularly when creating an investment portfolio. That is why diversification is necessary for your portfolio.

Under various market conditions, a well-balanced mix of various investment assets—stocks, bonds, and cash—as well as various kinds of stocks and bonds—keeps your portfolio growing.

For instance, during a bull market when stock values are up, bond yields often decrease. Bonds may cause you to lose money, but your portfolio's well-balanced equity portion should make up the difference. Investors may increase the value of bonds in depressed markets or during a crisis when stocks decline.

Investing in index funds and ETFs is one of the simplest strategies to achieve portfolio diversification. You gain exposure to hundreds or thousands of various stocks and bonds when you own low-cost funds in your portfolio.

With as few as two or three funds, you can build a well-diversified portfolio on your own, or you can hire professionals to do it with a target-date fund. Portfolio diversification can also be handled for you by financial advisors and Robo-advisors, albeit this will cost you a little more than if you handled it yourself.

Rebalancing your portfolio and allocating assets

The distribution of stocks, bonds, and cash in your portfolio is referred to as asset allocation. To achieve your objectives, you'll decide the percentage of each sort of asset in your portfolio based on your investment plan.

Your asset allocation has a tendency to become unbalanced over time as markets rise and fall. If shares of Tesla increase, your portfolio's equity allocation as a percentage will likely increase as well. Rebalancing is the process of buying and selling assets to restore the proper proportion of your portfolio while avoiding strategy disruption.

One of the major benefits of letting a Robo-advisor manage your portfolio can be this. The majority of robots perform rebalancing automatically, relieving you of the responsibility of maintaining a balanced allocation.


What does a good investment portfolio look like?

A wide variety of investments should be included in a diversified portfolio. For many years, financial consultants frequently advised creating a 60/40 portfolio, in which 60% of the capital would be invested in equities and 40% would be in fixed-income securities like bonds. Others, notably younger investors, have urged for greater equity exposure.

What are the 5 types of portfolios?

The 5 types of portfolios are:

  • The Aggressive Portfolio.
  • The Defensive Portfolio.
  • The Income Portfolio.
  • The Speculative Portfolio.
  • The Hybrid Portfolio.

What is a good return on your stock portfolio?

Generally speaking, a yearly ROI of around 7% or higher is regarded as a decent ROI for an investment in stocks. This also refers to the S&P 500's average annual return when inflation is taken into account. Due to the fact that this is an average, your return may vary from year to year.

What is an income portfolio?

Investment income, dividend income, interest income, and capital gains are all examples of portfolio income. Royalties from investment property are also regarded as sources of portfolio income. It belongs to one of the three primary types of revenue. Active income and passive income round out the list.

Where can a beginner invest?

A beginner can invest in the following ways:

  • 401(k) or employer retirement plan
  • A Robo-advisor.
  • Target-date mutual fund.
  • Index funds.
  • Exchange-traded funds (ETFs)
  • Investment apps.