You hear the term portfolio a lot, whether it’s a portfolio of clients, artistic portfolio, design portfolio, or if you are financially savvy, an investment portfolio. Essentially, a portfolio is a collection of things. In the case of an artistic portfolio, it’s a collection of pictures or works of art, and in the case of this article an investment portfolio is a collection of investments.
What is in an investment portfolio?
Investment portfolios are usually made up of a variety of asset classes, like stocks, bonds, guaranteed income certificates, gold and precious metals, mutual funds, and more. Depending on the type of investor you are, your portfolio may be made up of stocks with high volatility and sometimes high yield and be more risk centric, or could be strongly allocated to guaranteed return rates like bonds and guaranteed income certificates, and be very conservative.
Investment Portfolio Returns
All investment portfolios are structured to give a yield, or rate of return. At it’s simplest, this is calculated by taking the current value of the portfolio and dividing it by the original portfolio Value. Here is an example: In January you invested ten thousand dollars into a portfolio that consists of stocks and bonds. In August you sell everything in your portfolio and you make twelve thousand dollars. Your return or yield is twenty percent (12000/10000).
Often you will read about different portfolio’s in financial publications that talk about the “poor man’s portfolio” or the “couch potato portfolio” and their average return, this is what it refers to. It is very common for money manager’s and investment specialists to tout the latest portfolio they’ve created as the ideal investment vehicle, but it’s always wise for an investor to consider each asset in the portfolio before committing their money.
Portfolio vs Index
So what is the difference between a portfolio and an index? There are a couple of key differences. Indexes tend to be made up of a single set of assets, in most cases it’s a stock asset, like the Dow Jones Industrial Average or S&P 500. An investment portfolio can be made up of multiple assets, from stocks to jewels. The other main difference is historical data. most stock indexes keep the same assets for years at a time, whereas an investment portfolio can be rebalanced as many times as an investor wants, depending on their investment style.
So in summary, an investment portfolio is a collection of valued investments that an investor manages, and provides a return on investment (yield).