Your investment portfolio is a collection of different investments for which you have bet in order to earn income. The goal is not to lose the principal amount. Therefore, you only have one portfolio but it will include all of your investments. However, an investment portfolio is also something a bank or broker might offer, such as a mutual fund. This group of investments you do not have to do anything with once it is set up. It is based on the risks you were willing to take.
When you invest in a portfolio, you do so based on many factors – including risk level and the amount of money you have to invest. Usually you will be investing in a combination of stocks, bonds, and cash or cash equivalencies.
The way you decide upon asset allocation is based on how tolerant you are of risk. This is not just an emotional decision. This decision should be made based on your age, where you are in your career, your personal life, and the goals you have for all of these areas of your life. You will choose a portfolio based on these issues.
Depending upon your risk level and the amount of money you have to invest, you will choose a certain percentage of stocks, bonds and cash. The younger you are, the less risk averse you should be and the more percentage of your portfolio can be in stocks and bonds rather than cash. The opposite is true if you are at retirement age, or you have nothing extra and cannot risk losing your investments. By diversifying, you can mitigate your risk.
Choose and Let It Ride
If you are a smart investor, once you choose a portfolio you will leave it and let it ride for as long as you believed you would – usually until retirement. Therefore, if you are 22 and invest in a certain fund, it is already prearranged to keep a certain percentage of stocks, bonds, cash, and other investments during each year of the fund.
Re-balancing Your Portfolio
At some point, you may need to re-balance your portfolio to be assured it matches up with your financial goal. However, for the most part you will choose your allocation based on the money you have to invest and your risk tolerance level. Let it stay like that – slowly moving toward safer and safer investments, as you get closer to retirement. This only happens if you are self-managing because a managed fund will be automatically balanced without your intervention.
The main thing is to learn as many definitions as possible for all the new terms you are going to learn as you start your investing journey. Nevertheless, do not be afraid of learning and getting involved. Money is not scary and it is not beyond your understanding. The longer you do it, the more you will understand. So, get started as soon as possible, even if all you have is $100 dollars a month. In time, it will pay off.