What is an investment portfolio?

People generally believe that stocks, bonds, and cash comprise the core of a portfolio. Though this is often the case, it does not need to be the rule — a portfolio may contain a wide range of assets including real estate, art, and private investments.

You may choose to hold and manage your portfolio yourself, or you may allow a money manager, financial advisor, or another finance professional to manage your portfolio. The underlying reason for portfolio investment is to maximise returns while minimising risks. When building your own portfolio, you are diversifying the investment. The diversification can take place across different asset categories as well as within a certain category.

The underlying reason for portfolio investment is to maximise returns while minimising risks.

Features

• Diversified

Investment portfolios are a collection of assets, which is a display of diversified allocation. Diversification means distributing your capital into different investments, which is a common risk management strategy. Securities, gold, bonds, businesses, and real estate are frequently chosen by investors.

• Hedging

A diversified portfolio tends to be less closely correlated across asset classes. For example, when the stock market endures huge volatility, gold prices usually go higher driven by investors' hedging demand. If there is a portion of gold in your portfolio, loss in stock markets could be partly mitigated.

• Personalised

A healthy investment portfolio could help you ride out the ups and downs of markets. However, building an investment portfolio should be based on your own considerations. Risk tolerance and time horizons are the main concerns, which means how much loss you could bear and your expectation for the return cycle if your portfolio doesn't perform well while the broad market is on a downward trend.

Investment portfolios come in various types corresponding to their investing strategies. If you have abundant extra money and have a strong risk tolerance, you may prefer constructing an aggressive strategy to seek greater gains.

Understanding Financial Portfolios

One of the key concepts in portfolio management is the wisdom of diversification — which simply means not putting all of your eggs in one basket. Diversification tries to reduce risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximise returns by investing in different areas that would each react differently to the same event.

Regardless of your portfolio's asset mix, all portfolios should contain some degree of diversification, and reflect the investor's tolerance for risk, return objectives, time horizon, and other pertinent constraints, including tax position, liquidity needs, legal situations, and unique circumstances.

Although stocks, bonds, and cash are generally viewed as a portfolio's core building blocks, you may grow a portfolio with many different types of assets — including real estate, gold stocks, various types of bonds, paintings, and other art collectibles.

Types of Portfolios 

There can be as many different types of portfolios and portfolio strategies as there are investors and money managers. You also may choose to have multiple portfolios, whose contents could reflect a different strategy or investment scenario, structured for a different need.

A Hybrid Portfolio

The hybrid portfolio approach diversifies across asset classes. Building a hybrid portfolio requires taking positions in stocks as well as bonds, commodities, real estate, and even art. Generally, a hybrid portfolio entails relatively fixed proportions of stocks, bonds, and alternative investments.

A Portfolio Investment

When you use a portfolio for investment purposes, you expect that the stock, bond, or another financial asset will earn a return or grow in value over time. A portfolio investment may be either strategic, where you buy financial assets with the intention of holding onto those assets for a long time; or tactical, where you actively buy and sell the asset hoping to achieve short-term gains.

An Aggressive, Equities-Focused Portfolio 

The underlying assets in an aggressive portfolio generally would assume great risks in search of great returns. Aggressive investors seek out companies that are in the early stages of their growth and have a unique value proposition. Most of them are not yet common household names.

A Defensive, Equities-Focused Portfolio 

A portfolio that is defensive would tend to focus on consumer staples that are impervious to downturns. Defensive stocks do well in bad times as well as in good times. No matter how bad the economy is at a given time, companies that make products that are essential to everyday life will survive.

An Income-Focused, Equities Portfolio 

This type of portfolio makes money from dividend-paying stocks or other types of distributions to stakeholders. Some of the stocks in the income portfolio could also fit in the defensive portfolio, but here they are selected primarily for their high yields. An income portfolio should generate positive cash flow. Real estate investment trusts (REITs) are examples of income-producing investments.

A Speculative, Equities-Focused Portfolio 

A speculative portfolio is best for investors that have a high level of tolerance for risk. Speculative plays could include initial public offerings (IPOs) or stocks that are rumoured to be takeover targets. Technology or healthcare firms in the process of developing a single breakthrough product also would fall into this category.

Key Takeaways

• An investment portfolio is about diversified investment strategies.

• A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, as well as their fund counterparts.

• Stocks and bonds are generally considered a portfolio's core building blocks, though you may grow a portfolio with many different types of assets — including real estate, gold, paintings, and other art collectibles.

• Risk tolerance is the priority concern while creating a personalized investment portfolio.

• Diversification is a key concept in portfolio management, and diversified portfolios can better weather ups and downs in the markets.

• A person's tolerance for risk, investment objectives, and time horizon are all critical factors when assembling and adjusting an investment portfolio.

• Portfolio management is an important financial skill for active investing.

This article is for educational purpose and not to be regarded as investment advice, a recommendation, or an offer or solicitation to subscribe for, buy or sell any investment product. All forms of investments are subject to risks, including the possible loss of the principal amount invested. Losses can exceed your initial deposit. You should carefully consider your investment experience and objectives, financial situation, and risk tolerance level, and consult an independent financial adviser prior to dealing in any investment products. The contents in the article may have been obtained or derived from public or other sources believed by CMC Invest to be reliable. However, unless otherwise specifically stated, CMC Invest makes no representation as to the accuracy or completeness of such sources or the information, and accordingly accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. Please visit www.cmcinvest.com/en-sg/ for important information. This advertisement has not been reviewed by the Monetary Authority of Singapore.