Investing is a great way to make extra money without too much work, but you need to create a diverse portfolio. Here, we’ll break down exactly what an investment portfolio is and how you can use it to mitigate risk while buying and selling stocks, ETFs, and other assets.
What is an investment portfolio?
Investment portfolios can span a broad range of asset classes including stocks, bonds, Treasury bills, real estate investment trusts, exchange traded funds (ETFs), mutual funds, and certificates of deposit. These portfolios may also include options, depending on your investment style.
The reason people create a portfolio is to mitigate the amount of risk they may experience while investing. After all, there can be a fair amount of risk involved with investing. If one stock collapses and all your money is in that asset, you’ll lose a fair sum of money with no return. This can be disastrous for the beginner investor.
However, investment portfolios give you the chance to invest in several places. For example, a person with an investment portfolio invests in various stocks and a few ETFs. If one stock performs poorly, the investor will experience loss, but the loss could be mitigated by another stock or ETF that performs beyond expectations. It’s easy to see how an investment portfolio can help you in the long run.
How do you put together an investment portfolio?
The good thing about an investment portfolio is that you can create it without much work. All you need to do is invest in various stocks, bonds, ETFs, funds, or options. This automatically creates a portfolio with decreased risk. This is called increasing your risk tolerance, which is the degree of variability in investment returns that an investor is willing to withstand. It can help an investor have a realistic understanding of their financial ability.
Why create an investment portfolio?
Other than reducing risk, there are many reasons people create an investment portfolio. One of the biggest reasons people start an investment portfolio is for retirement. It allows them to create a larger nest egg without worrying their money could disappear. Retirement investors often focus on a diversified mix of low-cost investments for their portfolios. Index funds are also fairly popular in individual retirement accounts (IRAs) and 401(k) accounts due to the broad exposure asset classes at a minimum expense level.
Another huge reason people create an investment portfolio is if they are new to investing and aren’t sure of their style yet. Someone getting into investing may not be certain where they should spend their money, and this isn’t too unusual. It can be tough knowing which stocks will do well and which ones will underperform, but an investment portfolio is a good way to test the waters.
Beginners can discover whether they have a bullish or hawkish investing style, or if they prefer ETFs over stocks and bonds. Of course, it also could seriously help a beginner investor decrease the amount of money they could potentially lose while testing the waters.
