A portfolio refers to an investor or an institution’s total investments that consist of investment accounts and particular investments including financial assets like bonds, real estate, stocks, mutual funds, and other kinds of securities.
There are different kinds of portfolios. The most common types include aggressive portfolios, defensive portfolios, income portfolios, and socially responsible portfolios.
Aggressive portfolios are suitable for people who can tolerate high risks, especially young investors with long-term goals. Aggressive portfolios mostly contain stocks. Some people with an aggressive portfolio also prefer stocks of newly emerged companies. While these companies may bring about more gains, they are also likely to perform poorly or even go bankrupt.
Defensive portfolios, also called conservative portfolios, are for those with a low-risk tolerance. A defensive portfolio may hold more bonds than other securities. Mutual funds are often involved in this type of portfolio.
Income portfolios mostly contain assets that produce income. This type of portfolio is recommended for those retirees who need the investments as income after they stop working. Bonds and dividend-paying stocks are usually held in this portfolio.
Socially responsible portfolios not only help investors generate returns, but also take environmental, social, and governance factors into consideration.
What to consider when building a portfolio?
When you are building a portfolio, you should consider both the diversification and risk tolerance.
Diversification plays a critical role in building a portfolio. You should widely spread your money and try to invest in different companies, industries, and regions so that you do not have to rely too heavily on a single asset. This can help you reduce risk and cope with market volatility better.
Risk tolerance refers to investors’ ability to cope with the market turbulence both financially and emotionally. If you have a long-term goal, you can endure high risks because you have the time and chances to rebound from losses. If your goal is to get returns within several years, you may try to reduce your risk.