Just as the name would indicate, your portfolio is a collection of different financial investments – it can include more than just stocks, anything from bonds, liquid cash, ETFs (exchange traded funds) and even more concrete investments that we can hold in our hands, such as art and real estate holdings. However, because we are focused mainly on stocks, the main aspects of your portfolio that we are concerned with are stocks, bonds and any cash. Keeping a portfolio of different assets or investments, is important as it allows you to make money, from your money, and keep another source of income in addition to a salary you might earn from your job.
A Diverse Portfolio
Having a portfolio of investments is the key to becoming a smart, and successful investor, and managing that portfolio of investments is often done through a method known as diversification – essentially, having a number of different investments, of different types, rather than just being in one field. The same can be said from both a macro scale – when discussing your entire portfolio of investments, or from a micro scale – when we are discussing specifically just your portfolio of stocks only.
Diversification allows you to mitigate your risks, by not putting all your eggs in one basket. For instance, within your stock portfolio, if all your stocks are energy companies, and the energy market experiences a collapse, then your entire stock portfolio will collapse with it. However, if you have purchased stocks in all different sectors, just because one goes down, you will have others to keep yourself balanced. In essence, the idea of diversification explains that different areas of the economy may react to world events differently, some will go up while others may go down, therefore, when different things occur, you can move money from one area to the next.
Managing Your Portfolio
One of the best strategies to managing your portfolio is to view it as a pie chart, divided into slices, in which each piece represents a different asset class for your full portfolio, or within a stock portfolio, different sectors of the stock market. In order to balance your risk versus your returns, you want to construct a well-balanced chart, and take certain chances based on your appetite for risk and your knowledge and if you favor any specific sector or asset class. Its important to understand that stocks, bonds and liquid cash are considered to be the building blocks of a portfolio, as these items are the most easily transferable, and can move fairly easily. However, in certain instances, your full portfolio may include things like real estate, commodities, precious metals, art collections, collectible items, bonds and more.
Another good idea to keep in mind when managing your is to try and invest in low-risk securities and short-term investments, that have a low-risk low reward, and to keep high risk investments, that have a high potential for reward, at a relatively smaller piece of the puzzle as well. With a stock portfolio its important to think along the same terms, keep your stock portfolio diverse and in multiple sectors, with the majority of your investments in low risk, blue-chip or large-cap, stocks – generally strong, large companies, with a solid history, strong earnings and good fundamentals. Your smaller pieces of the pie should be in more higher risk stocks.
For more information on trading and investing, be sure to checkout the Stockia Education section.