In the world of finance and investment, the term “financial portfolio” is often used. Investors of all types, large and small, individual and institutional, are talking about adding to, acquiring, and diversifying their portfolios. The phrase financial portfolio can be applied to anyone who has financial assets, whether on Wall Street, Main Street, or any other street on earth.
A financial portfolio is nothing more than a carefully selected collection of discrete assets that have monetary value, are owned or controlled by an identifiable person or legal entity, and are designated for a specific financial purpose. A financial portfolio is not a random or haphazard combination of securities. A financial portfolio is a group of investments intentionally selected and organized by someone aiming at a predetermined and realistic goal.
A financial portfolio consists of investment securities such as stocks and mutual funds. However, a portfolio can include all kinds of valuable assets and even multiple asset classes. For example, a real estate mogul may own a portfolio of apartment complexes or office properties. Those who invest in art can have a portfolio of oil paintings or watercolors.
The modern use of the word portfolio dates back to the Italian days when the word “portafolio” meant a carrying case for important documents. In the 18th century, the word was appropriated by English-speaking peoples and took on financial connotations when artists and art dealers carried around drawings and paintings in folded canvases or cloth bags called portfolios. Ta. Later, the term was adapted to financial markets, as brokers and investors used leather portfolios to hold and transport their customers' physical stocks and bonds, and printed them on paper.
Modern portfolios aren't bound in leather or locked away in a safe. These are accounted for digitally and stored in brokerage accounts that are managed electronically from your laptop, tablet or mobile phone. Individual investors can have multiple portfolios. They may have a retirement portfolio consisting of stocks and bond mutual funds and a savings portfolio of corporate and government bonds. The sum of their holdings can be thought of as their overall financial portfolio.
The concept of a portfolio is very useful as an organizing principle.
People invest for different reasons. Some investments are for the distant future, while others you plan to use within a few years. Parents may invest some of their savings for their children and some for themselves. Each objective, each time period, and each beneficiary requires a different investment approach. Thinking about your financial assets in terms of a portfolio makes it much easier to manage your money properly.
Also, when assets are segregated into separate portfolios, it is easier to track performance against benchmarks such as stock indexes or other portfolios with similar objectives. Portfolios are much easier to analyze and adjust than unorganized investments.
Portfolio thinking is even more important for institutions such as insurance companies, banks, and asset managers that manage funds on an organizational scale. Consider Vanguard Group. Vanguard has more than $8.5 trillion in assets under management. Can you imagine the confusion if you didn't group these assets into portfolios by asset class and purpose?
A financial portfolio consists of financial assets. This typically consists of publicly traded securities traded on major exchanges. Securities are grouped into asset classes. A financial portfolio can include one or more asset classes, depending on its purpose.
Stocks (stocks)
Stocks represent equity or ownership in the company that issued them. Shareholders also have voting rights and, to that extent, have a say in the management of the company.
When considering stocks for their portfolio, investors look at factors such as market capitalization, sector, dividend income, earnings, and valuation metrics. A portfolio can include stocks of domestic or international companies.
Bonds (bonds)
Companies and governments often borrow money to raise capital through the issuance of bonds. A bond simply represents the issuer's debt. Investors who purchase bonds for their portfolio receive a stated interest rate over the life of the bond and get their principal back when the bond matures.
Bonds are rated according to their credit quality. U.S. government bonds are considered very safe. Investment grade corporate bonds carry a little more risk. High-yield “junk” bonds have a much greater risk of default.
It's wise to include bonds in your portfolio, but investors should choose carefully.
mutual funds
Mutual funds are professionally managed, usually diversified, pools of assets that investors can purchase for inclusion in their investment portfolios. All mutual funds have a stated investment objective, making it easy for investors to know which one to choose.
Mutual funds can focus on a single asset class, such as stocks, or invest in multiple types of securities. Fidelity Magellan Fund (ticker: FMAGX) is an example of a mutual fund that invests primarily in stocks. And within that asset class, we focus specifically on large-cap growth stocks. On the other hand, American Fund American Balanced A (ABALX) invests in a combination of stocks and bonds.
Mutual funds come in two varieties: open-end funds, which allow an unlimited number of shares to be issued to investors, and closed-end funds, which limit the number of shares and allow fund shares to be actively traded like stocks. .
Exchange Traded Fund (ETF)
Similar to mutual funds, exchange-traded funds (ETFs) are pools that manage investors' money. Although ETFs share characteristics with both open-end and closed-end funds, they are different types of securities.
ETFs are open-ended. This means that, like open-end mutual funds, new shares can be created as needed, but ETF shares trade on exchanges, just like stocks and closed-end funds.
ETFs are a very popular investment method. It is estimated that investors currently hold over $6 trillion in ETFs.
It's rare to find a modern financial portfolio that doesn't include at least some ETFs.
Real estate investment trust (REIT)
A real estate investment trust (REIT) is a company that specializes in investing assets in income-producing real estate. There are equity REITS, which directly own commercial real estate, and mortgage REITS (mREITS), which buy and hold financial products such as mortgages on commercial real estate. REITS are traded on exchanges like common stocks.
REITs must distribute at least 90% of their after-tax profits to shareholders as dividends. For this reason, investors consider them to be both equity vehicles and income vehicles. REITs are popular securities to include in portfolios because they give investors easy access to professionally managed commercial real estate.
cash equivalent
Cash equivalents are very short-term (usually less than 90 days) fixed income securities, such as Treasury bills and corporate money market instruments. It does not fluctuate with the market and is highly liquid. Cash equivalents can be converted into actual cash at any time.
Cash equivalents can be an important component of your financial portfolio because they provide unparalleled liquidity when you need it.
Investing always involves a certain amount of risk. From a portfolio management perspective, diversification means spreading out and minimizing some of your risk by owning a collection of different securities with different market characteristics.
A well-diversified, balanced portfolio has an appropriate mix of stocks, bonds, and cash. The equity portion of the portfolio will be further diversified to include stocks from different categories such as large-caps, small-caps, tech stocks, and blue-chip stocks. The same goes for bonds and other asset classes that can be diversified by maturity or credit quality.
The most important thing to remember when building a personal portfolio is that it must be suitable for the individual investor. Proper portfolio construction depends largely on his three factors: financial goals, risk tolerance, and time horizon.
It turns out that effective portfolios aim at specific, achievable goals. It is important to be clear in this area. You can't build an effective portfolio if you don't know what you're going to spend it on.
The next step is to determine your risk tolerance. Are you a conservative, moderate, or aggressive investor? The answers to these questions determine the risk profile of your portfolio and guide your stock selection.
Finally, you need to identify the time horizon of your portfolio. Some investments may be completely inappropriate for short-term goals. Similarly, not all securities work over the long term.
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