Investment Portfolio: Definition, Types & Building a Strong One

An investment portfolio is a set of financial assets owned by an investor that may include bondsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period., stocks, currencies, cash and cash equivalentsCash EquivalentsCash and cash equivalents are the most liquid of all assets on the balance sheet. Cash equivalents include money market securities, banker's acceptances, and commodities. Further, it refers to a group of investments that an investor uses in order to earn a profit while making sure that capital or assets are preserved.

Components of a Portfolio

The assets that are included in a portfolio are called asset classes. The investor or financial advisorFinancial AdvisorA Financial Advisor is a finance professional who provides consulting and advice about an individual’s or entity’s finances. Financial advisors can help individuals and companies reach their financial goals sooner by providing their clients with strategies and ways to create more wealth needs to make sure that there is a good mix of assets in order that balance is maintained, which helps foster capital growth with limited or controlled risk. A portfolio may contain the following:

1. Stocks

Stocks are the most common component of an investment portfolio. They refer to a portion or share of a company. It means that the owner of the stocks is a part owner of the company. The size of the ownership stake depends on the number of shares he owns.

Stocks are a source of income because as a company makes profits, it shares a portion of the profits through dividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. to its stockholders. Also, as shares are bought, they can also be sold at a higher price, depending on the performance of the company.

2. Bonds

When an investor buys bonds, he is loaning money to the bond issuer, such as the government, a company, or an agency. A bond comes with a maturity date, which means the date the principal amount used to buy the bond is to be returned with interest. Compared to stocks, bonds don’t pose as much risk, but offer lower potential rewards.

3. Alternative Investments

Alternative investments can also be included in an investment portfolio. They may be assets whose value can grow and multiply, such as gold, oil, and real estate. Alternative investments are commonly less widely traded than traditional investments such as stocks and bonds.

Types of Portfolios

Portfolios come in various types, according to their strategies for investment.

1. Growth portfolio

From the name itself, a growth portfolio’s aim is to promote growth by taking greater risks, including investing in growing industries. Portfolios focused on growth investments typically offer both higher potential rewards and concurrent higher potential risk. Growth investing often involves investments in younger companies that have more potential for growth as compared to larger, well-established firms.

2. Income portfolio

Generally speaking, an income portfolio is more focused on securing regular income from investments as opposed to focusing on potential capital gains. An example is buying stocks based on the stock’s dividends rather than on a history of share price appreciation.

3. Value portfolio

For value portfolios, an investor takes advantage of buying cheap assets by valuation. They are especially useful during difficult economic times when many businesses and investments struggle to survive and stay afloat. Investors, then, search for companies with profit potential but that are currently priced below what analysis deems their fair market value to be. In short, value investing focuses on finding bargains in the market.

Steps in Building an Investment Portfolio

To create a good investment portfolio, an investor or financial manager should take note of the following steps.

1. Determine the objective of the portfolio

Investors should answer the question of what the portfolio is for to get direction on what investments are to be taken.

2. Minimize investment turnover

Some investors like to be continually buying and then selling stocks within a very short period of time. They need to remember that this increases transaction costs. Also, some investments simply take time before they finally pay off.

3. Don’t spend too much on an asset

The higher the price for acquiring an asset, the higher the break-even point to meet. So, the lower the price of the asset, the higher the possible profits.

4. Never rely on a single investment

As the old adage goes, “Don’t put all your eggs in one basket.” The key to a successful portfolio is diversifying investments. When some investments are in decline, others may be on the rise. Holding a broad range of investments helps to lower the overall risk for an investor.

Additional Resources

Thank you for reading CFI’s explanation of investment portfolio. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

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