by What is an investment portfolio and how do you choose the right one? In this post, I’ll cover an introduction to investment portfolios.
Contents
How to think of an investment portfolio
Your investment portfolio is a lot like your diet, separated by category. For example, your target diet might consist of 45% carbohydrates, 30% protein, and 25% fats. Your target portfolio might consist of some percentage of cash, bonds (fixed income), and stocks (equity).
Diet Portfolio
Your ideal diet will depend on your individual circumstances like your goals. Here’s an example diet goal:
When: Within 6 months
What: Lose 10 pounds
How: Follow the best diet suitable for the goal
Investment Portfolio
Similarly, your portfolio will depend on your investment goal. For example:
When: Within 5 years
What: Build a nest egg of $50,000 for a down payment on a home
How: Investing in a portfolio suitable for the goal
Schwab categorizes portfolios this way:
Let’s explore the Moderate Allocation portfolio. Schwab states that this portfolio is “for long-term investors who don’t need current income and want some growth potential. Likely to entail some fluctuations in value, but presents less volatility than the overall equity market.”
This sounds about right for your investment goal in this example, where you don’t need current income and you want some growth potential. You can withstand some fluctuations since you won’t be needing this money for 5 years.
If you think the Moderate Allocation is right for your goals, you would invest in a portfolio consisting of 35% large-cap equity, 10% small-cap equity, 15% international equity, 35% fixed income, and 5% cash investments. Equity is just a fancy name for stocks, and fixed income is a fancy name for bonds.
Now this is just one portfolio. You may have other portfolios for your other goals, such as saving for a vacation (short-term) or your retirement (long-term). For your vacation coming up in a year, you might want to invest in the Conservative portfolio allocation. For your retirement in 35 years, you might want to invest in an Aggressive portfolio allocation.
Conclusion:
Your investment portfolio is lot like your diet portfolio. But rather than measuring in carbs, proteins, and fats, you measure in cash, bonds, and stocks.
Ready to re-examine your goals and choose the right portfolio for YOU?
Let me know in the comments!
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