What is portfolio?

Definition

A portfolio refers to a compilation of various financial assets, which may include stocks, bonds, cash, real estate, or unconventional investments.

Understanding a portfolio

A portfolio is a representation of an individual's financial situation, showing how they have divided their funds. Typically, a portfolio consists of stocks, bonds, and cash, but it can also contain other assets, such as art, real estate, or foreign currencies. The construction of a portfolio is influenced by several factors, including an individual's risk tolerance and investment timeline.

Example

Suppose an individual wants to invest $1,000 and diversify their investment across different asset classes. Initially, they may decide to invest $250 in Apple stock and $150 in Nike. However, if they fear relying too much on the performance of these two companies, they may opt to expand their investments. For instance, they could purchase $330 in municipal bonds and $270 in an index fund that tracks the S&P 500 to complete their portfolio. In this case, the individual would have 67% of their portfolio ($670) in stocks and 33% ($330) in bonds, resulting in a total investment of $1,000.

Indexes are not actively managed, do not incur management fees, costs, and expenses, and are not available for direct investment.

Gist

Every asset in the portfolio is a portion of the whole, which can include stocks, bonds, mutual funds, ETFs, or cash. The size of each portion is relative to the whole pie. For example, if stocks make up 50% of the portfolio, then the "stocks" portion would be half of the pie. As stock prices fluctuate, the size of that portion would also increase or decrease accordingly.