What is an Investment Portfolio?

The term "portfolio" often refers to a collection of works or a record of documents related to a subject, like a work portfolio, art portfolio, or writer's portfolio. But what exactly is an investment portfolio?

Unlike other kinds of portfolios, investment portfolios typically aren't physical collections (though you might hold a few physical assets, like gold). If you own stock or contribute to a retirement savings plan, you've already started creating an investment portfolio. 

Here, we'll take a closer look at what an investment portfolio is, and how to build and manage one.

Start your investment portfolio by opening an account with some of the best investment apps for helpful tools, education resources, portfolio customization, human advisor access, and more. 

What is an investment portfolio?

An investment portfolio is an accumulation of stocks, bonds, and other assets owned by an individual or institution. Portfolios refer to all of your investments. In fact, your investment portfolio may span across multiple accounts, including:

• Individual or joint brokerage account
• 401(k)s, IRAs, or other retirement plans
• Custodial account or 529 plan
• Money market account
• Peer-to-peer lending account

The kind of account you open will largely depend on your goals. Although the aim of any given investment portfolio varies from person to person, it generally revolves around generating interest and increasing financial gains.

Common assets held in an investment portfolio include:

• Stocks
• Bonds
• ETFs
• Mutual funds
• Cryptocurrencies
• Real-estate properties and REITs
• Commodities (e.g., physical metals, energy sources, agricultural products)

The assets available in your account are limited by your account type and the brokerage/investment platform you're investing through. Ensure that the account/platform offers the investment options you want before signing up. 

Why portfolio diversification is important

Having different types of assets in your investment portfolio can provide diversification, which helps reduce risk and potentially increase returns. Even if your portfolio is concentrated in equities, for example, having diversification through a few ETFs that provide exposure to thousands of underlying stocks means you're less exposed to the ups and downs of any one company.

For example, you might be weighing whether to invest in competing companies like Coca-Cola or PepsiCo. It's hard to say which one will do better in the future, so if you diversify by investing in both, you can reduce the risk that one will significantly lag the other. 

If you diversify further by also investing in other food and beverage companies, you can also reduce the risk of other companies taking market share from Coke and Pepsi — if that happens, your portfolio might still do well as your other assets potentially gain value.

Zooming out further, if you invest in a broad range of stocks, as well as assets like bonds and real estate, you can potentially reduce volatility and improve long-term performance. If interest rates fall, for example, then it's possible that bonds and real estate prices increase faster than stock prices. Or maybe the real estate market slows down, but by also investing in stocks in other industries, you can still see portfolio gains during this time.

In other words, portfolio diversification helps you spread your risk out so you're not so reliant on any one company or sector. So, you might enjoy more stable returns, which could potentially lead to higher returns over the long run vs. being too concentrated and potentially losing money.

Steps to build an investment portfolio

Building an investment portfolio happens naturally when making investments, such as in your retirement accounts. But you might want to be more intentional about how you build your portfolio. Some key steps include the following:

Define your financial goals

What are you looking to achieve? The key to creating a successful investment portfolio is to set clear and realistic goals to work toward. 

"The first step in constructing a portfolio is defining an investor's goals for their assets. This can be impacted by their risk tolerance, what sector they want to invest in, and region exposure," says Nathan Wallace, principal wealth manager at Savvy Advisors. "These different factors are the building blocks for determining the types of investments that will be used and how to combine them." 

Quick tip: Establishing goals is also one of the first steps in creating a successful financial plan. Other factors relevant to your financial plan may include age, paying down debt, and budgeting. If you're having trouble coming up with investment goals (or creating a financial plan in general), consult a professional such as CFP for expert guidance.

Investable assets like stocks and ETFs have varying lifespans and wealth-building capabilities. Therefore, certain investments may be better suited for you depending on your age, goals, how long you wish to invest, and current financial situation.

For example, investors nearing retirement age tend to invest in less risky assets, as there is less time to recover from a failed investment. Less volatile investment options often include dividend stocks, bonds, and other fixed-income securities. 

On the flip side, younger investors can get more out of long-term investing strategies that contain some volatility — such as buying index funds or real-estate properties — as investors in their 20s or 30s have more time to recover from the potential downfall of a riskier investment. 

"There is no correct portfolio for beginning investors, as often new entrants to the market (especially if they are young) will be best served by a higher-risk portfolio given the relationship between risk and return," Wallace explains. "That said, from a psychological perspective, high-risk portfolios can take a toll as investors will have to deal with more volatility and the possibility of larger drawdowns."

Determine risk tolerance and asset allocation

Risk tolerance is another major factor in determining which assets should be included in your investment portfolio. When constructing your investment portfolio, especially if working with a financial advisor, you'll often come up with an asset allocation that splits your portfolio into different percentages that align with your goals and risk tolerance. 

For example, if you're trying to save for retirement and buy a house, your asset allocation might be 80% stocks and 20% bonds. That way, most money goes toward long-term growth, while some is invested in low-risk assets that can be used for your down payment on a home when ready. 

Sure, all investments come with some level of risk. However, some investments, like crypto or individual stocks, tend to be more volatile than others. 

Some common ways to categorize risk tolerance include:

• Conservative: Best for cautious beginners, older investors, and short-term goals. Conservative investment portfolios largely have asset allocations consisting of bonds, dividend stocks, and other fixed-income securities like CDs. There's still likely some allocation to stocks, but it depends on factors like age. Keep in mind that lower-risk investments, like bonds, often produce smaller returns.
• Aggressive: Individuals with high risk tolerances or younger investors with time on their side often build aggressive portfolios, such as with an asset allocation primarily consisting of stocks, as well as perhaps some assets like real estate and a small portion in commodities or cryptocurrencies. 
• Moderate: A moderate investment portfolio includes both low-risk and high-risk securities so you can get exposure to long-term growth without risking as much volatility. It's not always a cut-and-dry 50/50 stock and bond allocation. Depending on your goals and preferences, your portfolio may be 40% bonds and 60% or something similar.

Determine your investing style

There are two main investing strategies: passive and active investing. Passive investing, where you simply try to match the market, like by investing in index funds, is typically best for beginners and folks who would rather have their portfolios managed for them. You still might have an aggressive asset allocation, but you're generally investing in funds that follow indexes, such as the S&P 500.

In contrast, active investing involves trying to beat the market, though the odds of doing so are typically tough. So, this strategy is often reserved for advanced investors who are willing to take the additional risk of underperforming the broader market. 

With either active or passive, you can get help from tools like robo-advisors that help you construct your portfolio or from a human financial advisor that assembles one with you. In general, though, active investing is a more hands-on strategy than passive, as it often involves buying and selling assets to try to time the market. Even if that's being handled by a professional fund manager, you'd likely want to keep a close eye on whether your active investments are beating their benchmarks or not.

Diversify your investments

Diversification typically reduces your portfolio's overall risk, and it's part of choosing an appropriate asset allocation. Putting all your eggs in one basket — such as buying stock in just one company — isn't advised as it leaves you vulnerable to the volatile nature of the market. 

"The goals of diversification are twofold: to reduce the risk and volatility of a portfolio while at the same time increasing risk-adjusted return," says Wallace. "Beginning investors can begin to diversify their portfolios by investing across asset classes, sectors, and uncorrelated securities."

One of the easiest solutions for how to diversify an investment portfolio is by investing in exchange-traded funds (ETFs) or mutual funds. Both are made up of various securities like stocks and bonds. ETFs are generally less expensive to invest in than mutual funds, which tend to have higher minimums and fees. 

Monitor and adjust your portfolio

Once you've built your portfolio, the work isn't over. Even if you're a passive investor, you still likely need to do some ongoing management of your portfolio. 

For one, you'll need to be diligent about evaluating the status of your investments and make sure your portfolio is on track to meet your investment goals. If your goals change or your current investments don't seem to be getting you there, you may want to reevaluate and possibly change your strategy. That's not to say you should abandon ship after every rough patch, but you might realize larger issues, like that you've been investing too conservatively for the past few years, and to be able to retire, you need to be more aggressive.

"Investors should review their portfolios periodically," Wallace says. "Each review should cover a review of the positions in the portfolio to assess whether the initial reasoning for purchasing a particular security still holds, and a review of the financial market and economic conditions and how changes to each impact the investor's portfolio."

Also, you likely want to rebalance your portfolio so that your asset allocation remains as intended. For example, if you started with 60% stocks/40% bonds, and bonds had a strong run, the gains might mean that 45% of your portfolio's value is now in bonds, while 55% is in stocks. So, rebalancing would involve selling some bonds to get back to 40% and buying stocks to get back to 60%. Doing so has the added benefit of essentially forcing your hand to buy low and sell high. 

How frequently you need to rebalance your portfolio depends on your personal preferences and situation, but doing so once or twice a year is usually a best practice. Some advisors rebalance for you, and some investment platforms have automated tools to help with this, while others require you to do the rebalancing yourself. 

Types of assets in an investment portfolio

Investment portfolios can hold a wide range of financial assets. Certain brokerage or investment accounts may have restrictions on what you can invest in, such as how your 401(k) provider likely has a set fund menu that you can choose from, but you could always consider opening additional accounts to access other types of assets. 

Some common types of assets in investment portfolios, whether you're a beginner or advanced investor, include:

Stocks

Stocks, also called equities, provide ownership stakes in companies. Holding stocks of individual companies can carry some risk if you're not properly diversified, but active traders might prefer to choose particular companies they think will outperform the market. You can also access stocks via either active or passive funds that provide exposure to a broad range of underlying companies. 

Note: Stocks technically differ from ETFs or mutual funds, as stocks refer to individual companies. However, you'll typically find that when people talk about asset allocation or when using a portfolio-building tool (such as within an investment app), stocks will be an overarching category, alongside other assets like bonds, while ETFs and mutual funds will not be categories. That's because you can get exposure to stocks (and sometimes other asset categories) through mutual funds and ETFs. The focus is on the characteristics of the underlying assets in these vehicles, as they largely determine your risk and ability to reach investment goals, not the vehicle itself.

Stocks tend to comprise a large portion of many investors' portfolios because they typically provide higher returns than assets like bonds yet aren't necessarily as speculative as some more niche assets like cryptocurrencies, so there's often a good risk/reward balance. 

Someone in their 20s, for example, might hold 100% of their investment portfolio in diversified stocks (likely through equity funds) if they have some cash set aside in an emergency fund and don't plan to access money from their investment portfolio until retirement. In that case, even if there's a stock market crash, they can wait out the likely recovery, as historically the U.S. stock market returns around 10% annually on average, even when accounting for crashes (though past performance never guarantees future returns). 

Bonds

Bonds are debt instruments, where the issuer such as a government or corporation essentially agrees to pay back your principal investment plus interest after a set period of time (though there are some exceptions, like zero-coupon bonds). Bond prices can fluctuate prior to maturity based on factors such as the broader interest rate environment, but if you buy and hold bonds until maturity, and the issuer doesn't default, you generally get a stable return.

Bonds are often called fixed-income instruments, as your investment typically yields a fixed rate of return, though some bonds have variable interest rates. Still, you can often earn income from these interest payments while holding the asset. 

Bonds often have lower returns than stocks, but they tend to have lower risk, and earning income from them periodically can be an incentive to hold a portion of your portfolio in bonds. That way, if you're living off of your portfolio, such as in retirement, you don't necessarily have to sell your assets. 

You can invest in individual bonds or bond funds for more diversification, albeit less control over the underlying bonds. Typically, the lower your risk tolerance, and the older you get — where you generally have less time to withstand market volatility — the higher the proportion of bonds in your investment portfolio. 

Real estate

Real estate is another common asset in investment portfolios, though depending on your perspective, many people don't consider their primary home to be part of their investment portfolios. Other real estate investments that are more likely to be bought and sold periodically, with less life disruption than moving from your primary home, can be valuable components to your investment portfolio, though the risk/reward can vary greatly based on the investment.

For example, buying an investment property might consume a large portion of your portfolio, which can create a risk of lack of diversification and limited liquidity, but there could be a large upside if you can earn rental income and eventually sell the property for a gain. 

Others prefer to invest in real estate through other vehicles, like real estate investment trusts (REITs), which are essentially like real estate stocks — you gain access to a share of a real estate portfolio, which can include dividends from rental income or property sales, and the price of the REIT can change based on the underlying real estate holdings. The rewards might not be quite as high as owning property directly, such as due to fees, but you gain advantages like professional management and more liquidity.

Deciding how much to allocate to real estate and what real estate holdings to select depends on various factors, such as your risk tolerance, tax situation, goals, and outlook. You might want to speak to a financial advisor to determine what a suitable real estate allocation looks like for your situation. 

Mutual funds and ETFs

Mutual funds and ETFs are funds that invest in an underlying basket of securities — often stocks, but sometimes other assets like bonds, real estate, or more complex financial instruments such as derivatives.

Investing in mutual funds or ETFs typically provides a low-cost, simple way to diversify your investments. Even if you're investing in 100% stocks, you can potentially access thousands of stocks through just one of these vehicles. 

Mutual funds and ETFs can be actively or passively managed, though ETFs typically are more passive. The main difference is that ETFs trade on a stock exchange and act like stocks, while mutual funds are bought and sold off of exchanges, often directly through the mutual fund provider.

Deciding how much of your investment portfolio to put in mutual funds and ETFs has more to do with your overall asset allocation and investment style. For example, if you have a moderate risk tolerance, you might invest 45% of your portfolio in equity funds, 45% in bond funds, and 10% in real estate that is not accessed through any fund.

Risk factors to consider when building and managing a portfolio

As you construct your portfolio and manage it afterward, it's important to consider different types of risk that your portfolio can either be subject to or geared toward minimizing. Some common ones include:

Market risk

Market risk is the risk associated with an asset's broader market, such as how stocks have stock market risk and bonds have bond market risk. These market risks can affect the price of individual stocks and bonds, regardless of the strength of these underlying assets. For example, a market risk is that the stock market will crash due to a recession. A particular company might still have a strong growth outlook, but pressure from investors quickly selling stocks throughout the market can drag down strong companies too.

Volatility risk

Volatility is the price swings up and down that can affect individual assets or markets as a whole. Volatility can be risky in the sense that if you can't handle the stress of seeing your portfolio value fluctuate, you might make ill-informed decisions like selling when assets are down, even if historically they tend to recover. 

Also, volatility can pose challenges for some investors like retirees who might prefer a stable portfolio that they can reliably draw from every year, such as taking out 4%. If you have a lot of volatility, that 4% can look very different year to year. And if you take out more to compensate for down years, then there's less in your portfolio that can enjoy a potential upswing.

Inflation risk

Inflation risk is where the rate of inflation outpaces your portfolio returns or at least cuts into them more than you'd like. The best allocation strategies for those worried about inflation risk could include putting some of your portfolio in assets like inflation-linked bonds, so during periods of high inflation, you can potentially rely on those assets to keep up while giving the rest of your portfolio more time to recover from high inflation periods.

Credit risk

Credit risk refers to a company's ability to meet its debt obligations. If you invest in bonds, for example, credit risk greatly affects your risk/return profile. Not all bonds are the same, such as how Treasuries have low credit risk as they're backed by the federal government, but as such, the returns are typically lower than corporate bonds, which typically have more credit risk.

Liquidity risk

Liquidity is another issue to be aware of, especially as you're managing your portfolio and possibly making changes to fit your evolving needs. Liquidity risk involves the risk of not being able to convert your assets into cash quickly. 

For example, physical real-estate assets are less liquid than stocks — you can typically sell stocks and convert the proceeds into cash within a day or so, whereas real estate could take months to sell. You might be comfortable with that risk at some points in your life, but if you're in a stage like retirement where you want to consistently sell portfolio assets and live off the proceeds, you might prefer more liquid assets like stocks and bonds (especially bond funds like ETFs). 

FAQs about building an investment portfolio

Tessa Campbell

Investing and Retirement Reporter

Tessa Campbell is an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa has built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts.ExperienceTessa currently reports on all things investing — deep-diving into complex financial topics,  shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage.As a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curates Business Insider’s guide on the best investment apps, she believes that your financial portfolio does not have to be perfect, it just has to exist. A small investment is better than nothing, and the mistakes you make along the way are a necessary part of the learning process.Expertise: Tessa’s expertise includes:

• Credit cards
• Investing apps
• Retirement savings
• Cryptocurrency
• The stock market
• Retail investing

Education: Tessa graduated from Susquehanna University with a creative writing degree and a psychology minor.When she’s not digging into a financial topic, you’ll find Tessa waist-deep in her second cup of coffee. She currently drinks Kitty Town coffee, which blends her love of coffee with her love for her two cats: Keekee and Dumpling. It was a targeted advertisement, and it worked.

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Jake Safane

Jake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, Carbon Neutral Copy, and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times.ExperienceJake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. His career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies.His interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life.His personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring.In his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time.ExpertiseJake’s areas of personal finance expertise include:

• Investing
• Banking
• Financial Planning
• Retirement
• Insurance

EducationJake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station.

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