# Portfolio Investment: Definition and Asset Classes

How to tailor your strategies for allocating stocks, bonds, and other investments

> **Definition**
>
> A portfolio investment is ownership of a stock, bond, or other financial asset with the expectation that it will earn a return or grow in value over time.

A portfolio investment involves acquiring and managing an array of financial assets such as stocks, bonds, and other securities while balancing risk and maximizing returns over time. Most Americans report feeling uncomfortable with the choices available to them, however, and being unready to tackle their portfolio investments.

A 2024 report from the U.S. Federal Reserve painted a stark picture: most Americans in the lower 90% of income earners felt adrift when managing their investment portfolios. More alarming is that two-thirds of non-retirees say they're not on track in saving for retirement.

### Key Takeaways

*   Common asset classes for portfolio investment include stocks, bonds, cash equivalents, real estate, commodities, and [alternative investments](https://www.investopedia.com/terms/a/alternative_investment.asp) like cryptocurrencies.
*   Diversification across asset classes and geographic regions is an important strategy to manage risk and potentially improve returns.
*   The right mix of assets in a portfolio investment depends on your risk tolerance, financial goals, and timeline.
*   Regular portfolio rebalancing is important to maintain your desired asset allocation because market moves can alter the portfolio's composition.

![Portfolio Investment: A collection of financial assets such as stocks and bonds owned by a person or an entity.](https://www.investopedia.com/thmb/HrsGdd3JZtrJaP0c6bsbi91Cl9M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Portfolio-investment_sketch_final-a6dfa21251534c5e857987a89ac61212.png)

*— Investopedia / Michela Buttignol*

David Tenerelli, a certified financial planner at Strategic Financial Planning in Plano, Texas, said that it's not hard to see why portfolio investing might seem "opaque" to many with many financial products on offer from so many companies and given the profound changes in the financial markets over the past half century or so,

"But in reality, today it’s easier than ever to put together a diversified, low-cost portfolio for any risk profile and time horizon," Tenerelli said. "Resources for investors of all experience levels abound. Knowledge is power, but you don’t have to become a financial prodigy to set yourself up for long-term success."

Learning the art of constructing and managing portfolio investments isn't just a skill for finance professionals. It's a necessity for anyone hoping to build long-term financial security given the vast changeover since the early 1980s from defined pension plans to 401(k)s for retirement planning.

Tenerelli noted that you don't have to go it alone. "Working with an advisor can help investors avoid pitfalls and approach optimization while integrating their investment planning with the rest of their financial situation, such as tax planning, estate planning, and insurance/risk analysis." Knowing how portfolio investing works is a benefit, however, whether you're a do-it-yourselfer or someone who feels better handing off your financials to professionals.

The ability to effectively choose investments for your portfolio can be the defining factor between a future marked by financial anxiety and one characterized by stability and relative comfort.

## How Portfolio Investments Work

Portfolio investment involves assembling a collection of financial assets with the goal of achieving specific [financial goals](https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/) while managing risk. The approach recognizes that assets perform differently under various economic conditions and some have greater risks with a greater potential for rewards than others.

Portfolio investments come from a range of asset classes including stocks, government bonds, corporate bonds, mutual funds, exchange-traded funds (ETFs), and [certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp). Your portfolio might also include more esoteric choices such as derivatives like options and futures or physical assets like real estate, commodities, and art and collectibles.

## Asset Allocation

Asset allocation is the process of determining how much of your portfolio to dedicate to each type of investment. This decision should be based on your financial goals, risk tolerance, and investment timeline. A young professional saving for retirement might have a higher allocation to stocks for growth potential, while a retiree might lean more heavily toward bonds for income and stability.

These styles typically range from conservative to aggressive,e with many variations in between:

*   Conservative investors prefer preserving their savings or capital and income and typically have a higher proportion of bonds and [cash equivalents](https://www.investopedia.com/terms/c/cashequivalents.asp).
*   Some investors opt for income-focused allocations for regular cash flow from dividends and interest payments.
*   Moderate allocations aim to balance risk and return with a more even mix of stocks and bonds.
*   Growth-oriented allocations emphasize capital appreciation with a larger share of stocks to potentially achieve higher long-term returns.
*   Aggressive allocations maximize exposure to stocks and higher-risk assets and are suitable for those with high-risk tolerance and longer investment horizons.  
    

Each style offers a different balance of potential risk and reward, allowing investors to align their portfolios with their financial circumstances and objectives.  

## Diversification

Diversification is the cornerstone of portfolio investments. Investors can cut the effect of any single asset’s poor performance by spreading investments across different asset classes, sectors, and geographical regions. This strategy helps to mitigate risk and can lead to more stable returns.

"At a basic level, a diversified portfolio will probably include at least some stocks and some bonds," Tenerelli said. He advised that those beginning with portfolio investments should look at ETFs and index or passive mutual funds, which are "the easiest, lowest-cost way" to assemble a portfolio that meets most people's needs.

"However, more research is warranted if investors wish to 'slice and dice' or 'tilt' their portfolio toward certain asset subclasses such as small-cap value or emerging markets," he said, "or if they wish to invest in more esoteric asset classes such as derivatives or private equity."

There are several approaches for diversifying a portfolio:

1.  You can distribute your investments across a wide range of vehicles, including cash, stocks, bonds, mutual funds, ETFs, and other financial instruments. Seek out assets whose historical returns have shown little correlation. They move independently of each other. This helps ensure that while one part of your portfolio may shrink, others could grow.
2.  Maintain diversity within each asset category. For stocks, this means including securities that vary by sector, industry, geographic region, and market capitalization. Some mix investment styles, such as [growth](https://www.investopedia.com/terms/g/growthinvesting.asp), income, and value. You can apply a similar approach to bonds by varying maturities and credit qualities.
3.  Invest in securities with different risk profiles and varying levels of risk and potential returns. This allows for the possibility that significant gains in higher-risk areas may offset losses in more stable investments.  
    

> **Important**
>
> Portfolio investing can be divided into two main categories. Strategic investing involves acquiring assets that are expected to grow significantly over time or generate consistent income. The tactical approach involves active trading to capitalize on short-term market movements.

## Managing Risk

A key aspect of risk management is understanding and adjusting for your risk tolerance which can change over time because of age, changes in finances, need for liquidity, and market conditions. This might involve gradually shifting to more conservative financial products as retirement approaches or adjusting strategies during periods of high market volatility.

You can use tools like [stop-loss orders](https://www.investopedia.com/terms/s/stop-lossorder.asp) to automatically sell assets if they fall below a certain price or employ options strategies to hedge against potential losses.

Managing risk also includes accounting for the risk-return trade-offs of each financial product. Lower risk levels generally correspond to lower potential returns. Higher risk levels are associated with higher potential returns. This chart represents the risk/return relationship with a higher risk typically but not always related to higher potential rewards.  

![Risk / Reward (lower risk/low potential reward vs. higher risk/higher potential returns)](https://www.investopedia.com/thmb/ATy7-9JyDvwHRX37Qy64cTn_HU0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/RiskReward-446f92fede554130886f56dbf1132dd6.png)

**

## Portfolio Investment Horizons

Investment horizons range from the short term such as hours, days, or weeks to much longer spans such as years and decades. Post-college professionals with [401(k) plans](https://www.investopedia.com/terms/1/401kplan.asp) would have investment horizons of decades. A day trader's horizon doesn't last beyond the trading on any given.

Portfolios that have shorter time horizons should generally be those where investors are willing to take on less risk, such as when retirement is imminent. The longer the horizon, the greater the risks you can take because you have time to make up for shortfalls. A longer-term investor may hold what are considered riskier types of equities such as mid-cap, small-cap, or high-growth stocks.

### Risk Tolerance

Those with a greater risk tolerance may favor investments in growth stocks, real estate, international securities, and options. More conservative investors generally opt for government bonds and [blue-chip stocks](https://www.investopedia.com/terms/b/bluechipstock.asp).

## Active vs. Passive Management

You must also decide whether you want to actively or passively engage with your portfolio investments. Active management involves buying and selling assets to outperform the market and it often requires extensive research and analysis. Passive management aims to replicate the performance of a specific index or benchmark, offering a cost-effective and lower-maintenance investment option.

The SPDR S&P 500 ETF Trust ([SPY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SPY)) is a passively managed fund that tracks the performance of the S&P 500 Index for long-term investors. The fund manager replicates the holdings by weight of the S&P 500's large-cap stocks.  

### Tax Considerations

The type and amount of assets you'll choose for your portfolio investments will often depend in part on their tax efficiency. Different assets and accounts are subject to varying [tax treatments](https://www.investopedia.com/terms/t/tax-benefit.asp) which can greatly impact your returns in the long run. Using tax-advantaged accounts can help minimize tax liabilities and increase your after-tax returns.  

## Asset Classes

Asset classes are sets of investments that share similar characteristics and behave similarly in the marketplace. These are the most commonly traded.

### Equities (Stocks)

Equities represent ownership in a company and are typically traded on stock exchanges or over-the-counter ([OTC](https://www.investopedia.com/terms/o/otc.asp)) markets. Investors can earn returns from equities in two ways: capital appreciation or increases in the stock price and dividends or periodic payments to shareholders. There are two main types of equities:

1.  **Common stock**: Common stock offers ownership and voting rights.
2.  **Preferred stock**: This is a hybrid security with characteristics of both debt and equity. It usually pays fixed dividends and has priority over common stockholders in the case of liquidation.

Stocks are generally considered riskier than other asset classes but they can deliver higher returns over the long term. Their performance is influenced by company performance, market conditions, and broader economic trends.

### Fixed-income Securities (Bonds)

Fixed-income securities are investments that provide returns through regular interest payments and the return of principal at [maturity](https://www.investopedia.com/terms/m/maturity.asp). They have several features:

*   **Regular income**: Investors receive periodic interest payments known as coupons.
*   **Principal repayment**: The initial investment is typically returned at maturity.
*   **Inflation risk:** Returns may not always keep pace with inflation, potentially reducing purchasing power over time.
*   **Liquidity**: While less liquid than equities, many fixed-income securities can be traded on secondary markets.
*   **Less risk**: Bonds are typically viewed as less risky than equities. They offer more stable but potentially lower returns.
*   **Price fluctuations**: Bond values can change based on shifts in interest rates and the issuer's credit risk.

Bonds play a crucial role in many portfolio investments, providing income stability and often serving as a counterbalance to the higher volatility of stocks. Investors should consider interest rate and credit risks, however, as well as the potential impact of inflation.

### Cash and Cash Equivalents

Cash and cash equivalents form a crucial component of many portfolios, offering stability and liquidity. This asset class includes cash, bank deposits, money market funds, short-term government securities such as Treasury bills, and highly liquid, short-term debt instruments.

These assets are characterized by their high [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), meaning they can be quickly converted to cash with little to no loss of value. They typically offer lower returns than stocks or bonds but provide a safety net and ready funds for immediate needs or investment prospects.

While cash and cash equivalents offer stability and liquidity, they [don't necessarily keep pace with inflation](https://www.investopedia.com/are-you-overprotecting-your-wealth-11714015) over the long term. Holding onto these assets often results in a gradual erosion of purchasing power. Investors, therefore, usually have to balance liquidity and safety with higher-yielding investments to achieve their long-term financial goals.

### Alternative Portfolio Investment: Real Estate

[Alternative portfolio investments](https://www.investopedia.com/how-to-diversify-portfolio-with-alternatives-8779439) are a broad category of assets that fall [outside the traditional](https://www.investopedia.com/alternative-investments-for-your-legecy-plan-11727493) list of stocks, bonds, and cash. Many alternative investments have low liquidity. They can be difficult to buy or sell quickly. They're also often associated with higher potential returns but also higher risk. They can require far greater knowledge or expertise.

Real estate investing involves buying, owning, managing, selling, or financing real estate properties to generate profit. [Real estate investments](https://www.investopedia.com/commercial-vs-residential-real-estate-investing-8414678) fall into two main categories:

*   **Real estate**: This includes residential properties such as single-family homes, apartments, and condos as well as commercial properties such as office buildings, retail spaces, and industrial facilities. It also includes land.
*   **REITs**: These are companies that own, operate, or finance income-producing real estate. [REITs](https://www.investopedia.com/terms/r/reit.asp) allow investors to gain exposure to real estate without directly owning and managing physical properties.

Real estate can generate income through rent and can appreciate in the long term but it also comes with risks such as market fluctuations. Property values and income are often greatly affected by changes in the overall economy, interest rates, and local market conditions. Maintenance costs, vacancies, and liquidity risks are all risks that come with investing in real estate.

### Alternative Portfolio Investment: Commodities

Commodities are the oldest traded goods. They're typically raw materials or agricultural products that are traded either OTC or on exchanges like the [Chicago Board of Trade](https://www.investopedia.com/terms/c/cbot.asp). Common examples include precious metals including gold, silver, and copper, energy resources such as oil and natural gas, agricultural products like wheat, corn, and livestock, and industrial metals such as copper and aluminum. These investments offer several features:

1.  **Diversification**: Commodities often have a low correlation with stocks and bonds, potentially reducing the overall risk of your portfolio.
2.  **Inflation hedge**: Many commodities increase in value during inflationary periods, helping to preserve purchasing power.
3.  **Market-specific drivers of demand**: Commodity prices are primarily driven by global supply and demand specific to the seasonality and fluctuations of each good. They can also be influenced by weather, geopolitical events, and [economic cycles](https://www.investopedia.com/terms/e/economic-cycle.asp).
4.  **Volatility**: Commodity prices can be highly volatile, offering potential for high returns and significant risk.

Investors can gain exposure to commodities through direct ownership, futures contracts whose value is based on their expected value, commodity-linked ETFs and mutual funds, and shares in commodity-producing companies.

### 14.9%

According to J.P. Morgan Chase, alternative investments hit a record high during the pandemic at about 15.5% of all portfolio investments. This was down to about 14.9% at the end of 2023.

### Additional Alternative Investments

Commodities can offer portfolio diversification and potential inflation protection but they also come with unique risks including storage costs for physical commodities, complex pricing, and high sensitivity to global economic and political events.  

Alternative portfolio investments typically include the following in addition to real estate and commodities:

*   **Art and collectibles**: Tangible assets like art, antiques, and rare coins can rise in value over time.
*   [**Cryptocurrencies**](https://www.investopedia.com/terms/c/cryptocurrency.asp): Digital currencies run on blockchain technology, offering a new asset class for investors.  
    
*   **Hedge funds**: These are pooled investment funds that use leverage, derivatives, and other highly sophisticated trading techniques for institutional investors.  
    
*   [**Private equity**](https://www.investopedia.com/terms/p/privateequity.asp): These investments in private companies or buyouts of public companies result in their delisting from public stock exchanges.  
    

## Portfolio Investments Examples

Suppose you have $100,000 to invest. You decide to build a diversified portfolio with the following asset allocation:

**60% Stocks:**

*   40% U.S. large-cap stocks
*   10% U.S. small-cap stocks
*   10% international stocks

**35% Bonds:**

*   25% U.S. [investment-grade bonds](https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/)
*   10% U.S. high-yield bonds

**5% REIT Shares**

The portfolio is designed to provide exposure to various asset classes with different risk and return characteristics. The bulk goes to stocks for growth potential, with a significant portion in U.S. large-cap firms for stability. Bonds provide income and help mitigate overall portfolio risk. REITs offer exposure to the real estate market.

The initial investment of $100,000 meets its target percentages, but the portfolio investment allocations will shift as the markets move. The equity portion may grow to 65% of the portfolio if stocks have a strong year.

You must periodically rebalance your portfolio to maintain the intended risk profile. This means selling portions of the outperforming assets and using the proceeds to buy underperforming assets. You can return the allocation to the original 60% stock / 35% bond / 5% REIT mix in this way.

You'll generate returns or losses that blend the returns of the individual asset classes in the long term. This diversification helps smooth out volatility compared with investing in one asset class or another.

## How Do I Build a Portfolio?

You'll want to start with having an understanding of the different asset classes such as stocks, bonds, and real estate and then assessing your investment goals and risk tolerance. Aim for diversification by including a mix of these asset classes to mitigate risk and select specific investments within each category.

Regularly review and rebalance your portfolio to maintain your desired asset allocation and consider seeking professional advice if needed to tailor your strategy to your finances, risk tolerance, and goals.

## How Should Investors Approach Their Existing Portfolio Investments?

Tenerelli told Investopedia, "The first step is to determine whether that portfolio is right for your goals, objectives, risk profile, and time horizon." He advised that the process should include a comprehensive analysis of your finances and a detailed review of your portfolio's composition.

## What Is a Balanced Portfolio?

A balanced portfolio typically combines a mix of asset classes, including equities, bonds, and perhaps a low percentage of alternative investments, to achieve your desired level of risk and return.

A traditional strategy is the [60/40 portfolio](https://www.investopedia.com/the-60-40-portfolio-makes-a-comeback-7500506) which allocates 60% to stocks for growth potential and 40% to bonds for stability and income. This approach aims to provide capital appreciation and income generation while managing risk through diversification because different asset classes often react differently to market conditions. 

## The Bottom Line

Portfolio investments involve acquiring diverse financial assets to generate returns over time, including stocks, bonds, real estate, and commodities. Investors can [mitigate risk](https://www.investopedia.com/articles/stocks/08/mitigating-risk.asp) and potentially improve their returns by diversifying across different asset classes because various assets often respond differently to changing market conditions.

> **Article Sources**
>
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