# Financial Portfolio: What It Is and How to Create and Manage One

![Financial Portfolio](https://www.investopedia.com/thmb/0VrXWhfooj6-RPyyvp7HoCdq1Vo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term_Defination_Financial.Portfolio-367fc73212ac456aa607ad135db4ffa0.jpg)

*— Tara Anand / Investopedia*

> **Definition**
>
> A financial portfolio is a basket made up of positions in various investments that work together to serve an investor’s goals.

## What Is a Financial Portfolio?

A portfolio is a collection of financial investments such as stocks, bonds, commodities, cash, and cash equivalents including closed-end funds and exchange-traded funds (ETFs).

People generally believe that stocks, bonds, and cash create the core of a portfolio. This is often the case but it doesn't have to be the rule. A portfolio can contain a wide range of assets including real estate, art, and private investments.

You might choose to hold and manage your portfolio yourself or you may allow a money manager, financial advisor, or another finance professional to manage your portfolio for you.

### Key Takeaways

*   A portfolio is a collection of financial investments such as stocks, bonds, commodities, cash, and cash equivalents as well as their fund counterparts.
*   Stocks and bonds are generally considered to be a portfolio’s core building blocks but you can grow a portfolio with many types of assets including real estate, gold, paintings, and other art collectibles.
*   Diversification is a key concept in portfolio management.
*   A person’s tolerance for risk, their investment objectives, and their time horizon are all critical factors when assembling and adjusting an investment portfolio.
*   Portfolio management is an important financial skill for active investing.

## How Financial Portfolios Work

One of the key concepts in [portfolio management](https://www.investopedia.com/terms/p/portfoliomanagement.asp) is the wisdom of [diversification](https://www.investopedia.com/terms/d/diversification.asp): not putting all your eggs in one basket. Diversification tries to reduce [risk](https://www.investopedia.com/terms/r/risk.asp#axzz1dgzOuyIo) by allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

There are many ways to diversify. How you choose to do it is up to you. Your goals for the future, your appetite for risk, and your personality are all key factors in deciding how to build your portfolio.

All portfolios should contain some degree of diversification, regardless of your portfolio’s asset mix. They should reflect the investor’s tolerance for risk, [return](https://www.investopedia.com/terms/r/return.asp) objectives, [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp), and other pertinent constraints. These can include tax position, [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) needs, legal situations, and unique circumstances.

> **Fast Fact**
>
> "Portfolio” comes from the Latin word folium. It means to “carry leaves” as in papers. Stock and bond certificates were once issued only in paper form.

## Managing a Portfolio

Think of an investment portfolio as a pie that's been divided into pieces of varying wedge-shaped sizes, each piece representing a different asset class and type of investment.

Investors aim to construct a well-diversified portfolio to achieve a [risk-return portfolio allocation](https://www.investopedia.com/ask/answers/071515/how-can-i-measure-portfolio-variance.asp) that's appropriate for their level of risk tolerance. Stocks, bonds, and cash are generally viewed as a portfolio’s core building blocks but you can grow a portfolio with many types of assets including real estate, [gold stocks](https://www.investopedia.com/top-gold-stocks-q2-2023-7372643), various types of bonds, paintings, and other art [collectibles](https://www.investopedia.com/terms/c/collectible.asp).

![50% bonds, 30% short-term investments, and 20% stocks provide an example of a conservative investment portfolio.](https://www.investopedia.com/thmb/jZDWZXWoce8eRTQGaM_8MEjRo1c=/1114x0/filters:no_upscale():max_bytes(150000):strip_icc()/conservativeportfolio-tardi-d19760c073f44c5b94bf060071963751.jpg)

*— Carla Tardi / Investopedia*

This sample portfolio allocation is for an [investor](https://www.investopedia.com/terms/i/investor.asp) with a low tolerance for risk. A conservative strategy generally tries to protect a portfolio’s value by investing in lower-risk securities. You’ll see in this example that a full 50% is allocated to [bonds](https://www.investopedia.com/terms/b/bond.asp) that might contain high-grade corporates and government bonds including [municipals (munis)](https://www.investopedia.com/terms/m/municipalbond.asp).

The 20% stock allocation could be made up of blue-chip or large-cap equities and 30% of [short-term investments](https://www.investopedia.com/terms/s/shorterminvestments.asp) might include cash, certificates of deposit (CDs), and high-yield savings accounts.

> **Important**
>
> Most investment professionals agree that diversification is a key component for reaching long-range financial goals while minimizing risk although it doesn't guarantee against loss.

## Types of Portfolios

There can be as many [types of portfolios](https://www.investopedia.com/articles/basics/11/5-popular-portfolio-types.asp) and portfolio strategies as there are investors and money managers. You might also choose to have multiple portfolios whose contents could reflect a different strategy or investment scenario structured for a different need.

## The Hybrid Portfolio Approach

The hybrid portfolio approach diversifies across [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp). Building a hybrid portfolio requires taking positions in stocks as well as bonds, commodities, real estate, and even art. A hybrid portfolio generally entails relatively fixed proportions of stocks, bonds, and alternative investments. This is beneficial because stocks, bonds, and alternatives have historically exhibited less-than-perfect correlations with one another.

## Portfolio Investment

You expect that the stock, bond, or another financial asset will earn a return, grow in value over time, or both when you use a portfolio for investment purposes. A portfolio investment may be either [strategic](https://www.investopedia.com/articles/company-insights/083116/portfolio-planning-process-step-step.asp) where you buy financial assets with the intention of holding onto those assets for a long time or tactical where you actively buy and sell the asset hoping to achieve short-term gains.

### Aggressive Equities-focused Portfolio

The underlying assets in an aggressive portfolio generally assume great risks in search of great returns. Aggressive investors seek companies that are in the early stages of their growth and have a unique [value proposition](https://www.investopedia.com/terms/v/valueproposition.asp). Most of them aren't yet common household names.

### Defensive Equities-focused Portfolio

A defensive portfolio would tend to focus on consumer staples that are impervious to downturns. Defensive stocks do well in bad times as well as in good times. Companies that make products that are essential to everyday life will survive no matter how bad the economy is at a given time.

### Income-focused Equities Portfolio

This type of portfolio makes money from dividend-paying stocks or other types of distributions to stakeholders. Some of the stocks in the income portfolio could also fit in the defensive portfolio but they're selected primarily for their high [yields](https://www.investopedia.com/terms/y/yield.asp) in this case. An income portfolio should generate positive cash flow. [Real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp) are an example of an income-producing investment.

### Speculative Equities-focused Portfolio

A speculative portfolio is best for investors who have a high tolerance for risk. Speculative plays could include [initial public offerings (IPOs)](https://www.investopedia.com/terms/i/ipo.asp) or [stocks](https://www.investopedia.com/terms/s/stock.asp) that are rumored to be takeover targets. Technology or healthcare firms in the process of developing a single breakthrough product would also fall into this category.

### Impact of Risk Tolerance on Portfolio Allocations

A financial advisor can create a generic portfolio model for an individual but an investor’s risk tolerance should significantly reflect the portfolio’s content.

## Time Horizon and Portfolio Allocation

Investors should also consider how long they have to invest when they're building a portfolio. Investors should generally move toward a conservative asset allocation as their goal date approaches to protect the portfolio’s earnings up to that point. A conservative investor might favor a portfolio with large-cap value stocks, broad-based market index funds, investment-grade bonds, and a position in liquid, high-grade cash equivalents.

Take an investor who's saving for retirement and plans to leave the workforce in five years. They might want to invest a larger portion of the portfolio in more conservative assets such as bonds and cash to help protect what has already been saved even if they're comfortable investing in stocks and riskier securities.

An individual who's just entering the workforce might want to invest their entire portfolio in stocks because they have decades to invest and the ability to ride out some of the market’s short-term [volatility](https://www.investopedia.com/terms/v/volatility.asp).

## How Do You Create a Financial Portfolio?

Building an investment portfolio requires more effort than the passive, index-investing approach. You must first identify your [goals](https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/), risk tolerance, and time horizon then research and select stocks or other investments that fit within those parameters. Regular monitoring and updating are often required along with entry and exit points for each position.

Rebalancing requires selling some holdings and buying more of others so your portfolio’s asset allocation matches your strategy, risk tolerance, and desired level of returns most of the time.

Defining and building a portfolio can increase your investing confidence and give you control over your finances despite the extra effort required.

## What Does a Good Portfolio Look Like?

A good portfolio will depend on your investment style, goals, risk tolerance, and time horizon. A good degree of diversification is generally recommended regardless of the portfolio type so you're not holding all your eggs in one basket.

## How Do You Measure a Portfolio’s Risk?

A portfolio’s standard deviation of returns or [variance](https://www.investopedia.com/terms/p/portfolio-variance.asp) is often used as a proxy of overall portfolio risk. The standard deviation calculation isn't merely a weighted average of the individual assets’ standard deviations. It must also account for the [co-variance](https://www.investopedia.com/articles/financial-theory/11/calculating-covariance.asp) among the different holdings.

The standard deviation calculation for a two-asset portfolio is:

σp\= (w1σ1 \+ w2σ2 \+ 2w1w2Cov1,2)

## The Bottom Line

A portfolio is the cornerstone of investing in the markets. It's composed of the various positions in stocks, bonds, and other assets held and is viewed as one cohesive unit. The portfolio components must therefore work together to serve the investor’s financial goals, constrained by their risk tolerance and time horizon.

Portfolios can be constructed to achieve various strategies, from index replication to income generation to capital preservation. Diversification is seen as a good way to reduce risk regardless of the strategy without sacrificing the portfolio’s expected return.

_The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info._

> **Article Sources**
>
> 1.  Perry J. Kaufman. “[Trading Systems and Methods](https://www.wiley.com/en-sg/Trading+Systems+and+Methods%2C+6th+Edition-p-9781119605355),” Pages 681–733_._ Wiley Trading Series, 2019.
>     
> 2.  Merriam-Webster Dictionary. “[Portfolio](https://www.merriam-webster.com/dictionary/portfolio).”