Getting into investment, you will often hear about ‘portfolios’ and how investors try to diversify their portfolios. But what exactly does this mean?
Below, we talk about the what, why’s, and how’s of investment portfolios, and how to use it to your advantage when trading and investing.
What is an Investment Portfolio?
An investment portfolio is a group of investments that can include investments into stocks, bonds, Treasury bills, mutual funds, exchange-traded funds (ETFs), real estates investment trusts, as well as certificates of deposits. Because of how diverse a portfolio can be, investors tend to use it to decrease the risk involved in investing. For example, if a stock collapses and you have allocated all your funds into that stock, you will end up losing money with no returns. If you diversify your portfolio so that you are invested in several different stocks and some ETFs, one stock performing poorly can be evened out by another stock or ETF that has performed beyond expectations; thus decreasing risk and lessening the loss.
How do You Put Together an Investment Portfolio?
Investment portfolios are fairly easy to create. All you really need to do is invest in various stocks, bonds, ETFs, funds, or other options. This will automatically create a portfolio with a reduction of risk.
Reducing the risks of investing is called increasing risk tolerance. Risk tolerance is the degree in which capacity of investment returns an investor is willing to withstand. This helps give investors an insight into their financial ability.
Why Create an Investment Portfolio?
While risk reduction is a large part as to why people should create portfolios, many people create investment portfolios for different reasons. For one, investment portfolios are often started for retirement. Investment portfolios allow for a hope for a bigger retirement fund without the worry that the money invested would disappear completely. Those who are investing towards retirement will tend to go for low-cost investments for their portfolios. An example of this is index funds in Individual Retirement Accounts (IRAs) and 401(k).
Another reason why people create investment portfolios is if they are new to investing. Most beginner investors will be unsure which stocks will do well and which will underperform, and thus be uncertain about where they should invest their money. An investment portfolio is a good way to explore investments and learn about these things. With the help of investment portfolios, beginner investors can also discover their investing style and preferences with decreased risks of a potentially significant loss.
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