What Is a Portfolio Investment?
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, or both. It entails passive or hands-off ownership of assets as opposed to direct investment, which would involve an active management role.
Portfolio investment may be divided into two main categories:
- Strategic investment involves buying financial assets for their long-term growth potential or their income yield, or both, with the intention of holding onto those assets for a long time.
- The tactical approach requires active buying and selling activity in hopes of achieving short-term gains.
Understanding Portfolio Investment
The term portfolio investments covers a wide range of asset classes including stocks, government bonds, corporate bonds, real estate investment trusts (REITs), mutual funds, exchange-traded funds (ETFs), and bank certificates of deposit.
Portfolio investments can also include more esoteric choices including options and derivatives such as warrants and futures.
Key Takeaways
- A portfolio investment is an asset that is purchased in the expectation that it will earn a return or grow in value, or both.
- A portfolio investment is passive, unlike a direct investment, which implies hands-on management.
- Risk tolerance and time horizon are key factors in selecting any portfolio investment.
There also are physical investments such as real estate, commodities, art, land, timber, and gold.
In fact, a portfolio investment can be any possession that is purchased for the purpose of generating a return in the short or long term.
Making Choices
The composition of investments in a portfolio depends on a number of factors. The most important are the investor’s tolerance for risk and investment horizon. Is the investor a young professional with children, a mature person looking forward to retirement, or a retiree looking for a reliable income supplement?
Those with a greater risk tolerance may favor investments in growth stocks, real estate, international securities, and options, while more conservative investors may opt for government bonds and blue-chip stocks.
A portfolio investment can be anything from a stock or a mutual fund to real estate or art.
On a larger scale, mutual funds and institutional investors are in the business of making portfolio investments. For the largest institutional investors such as pension funds and sovereign funds, this may include infrastructure assets like bridges and toll roads.
Portfolio investments by institutional investors generally are held for the long term and are relatively conservative. Pension funds and college endowment funds are not invested in speculative stocks.
Portfolio Investments for Retirement
Investors saving for retirement are often advised to focus on a diversified mix of low-cost investments for their portfolios.
Index funds have become popular in individual retirement accounts (IRAs) and 401(k) accounts, due to their broad exposure to a number of asset classes at a minimum expense level. These types of funds make ideal core holdings in retirement portfolios.
Those who want a more hands-on approach may tweak their portfolio allocations by adding additional asset classes such as real estate, private equity, and individual stocks and bonds to the portfolio mix.
FAQs
The term portfolio investments covers a wide range of asset classes including stocks, government bonds, corporate bonds, real estate investment trusts (REITs), mutual funds, exchange-traded funds (ETFs), and bank certificates of deposit.
What are the asset classes of a portfolio? ›
Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix.
What are the 7 asset classes? ›
The main asset classes include (1) equities (2) debt (3) commodities (gold &precious metals, agricultural products, energy, etc.) (4) cash (5) currency (6) real estate and (7) alternatives. Each asset class has its unique traits, and each offers its own blend of reward and risk.
What is the best definition for portfolio investment? ›
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs). People generally believe that stocks, bonds, and cash comprise the core of a portfolio.
What is the difference between asset and portfolio? ›
Asset management typically focuses solely on managing assets or funds. wealth management may include financial planning services such as tax planning, retirement planning, and estate planning. Portfolio management focuses on constructing and managing a diversified investment portfolio.
What are the 5 categories of assets? ›
When we speak about assets in accounting, we're generally referring to six different categories: current assets, fixed assets, tangible assets, intangible assets, operating assets, and non-operating assets.
What is the difference between an asset and an investment? ›
Assets are “acquired” and owned, while investments are “made” and owned. The intent of an investment is appreciation of value over time. You may own real estate as an asset, but you may also invest in that same real estate with the intent of making a financial gain from it.
What is the safest asset class? ›
Safe assets are those that allow investors to preserve capital without a high risk of potential losses. Such assets include treasuries, CDs, money market funds, and annuities.
What is the best asset class to invest in? ›
11 best investments right now
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
- Alternative investments.
- Cryptocurrencies.
- Real estate.
Real estate is the world's biggest asset class, with a projected value of $613.60 trillion in 2023.
All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value—even their entire value—if market conditions sour. Even conservative, insured investments, such as certificates of deposit (CDs) issued by a bank or credit union, come with inflation risk.
Why do you need a portfolio investment? ›
Portfolio investment means owning a mix of different assets. It aims to reduce risk through diversification. Portfolio investment has the potential for greater returns over time. Portfolios can be customised to suit your individual needs.
How much money should you invest in a portfolio? ›
How much should you be investing? Some experts recommend at least 15% of your income. Setting clear investment goals can help you determine if you're investing the right amount. If you're new to investing, you might be asking yourself how much you should invest, or if you even have enough money to invest.
Which asset class has the highest return? ›
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.
What is the best asset mix for a portfolio? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
What are the three main categories of assets in the portfolio? ›
Three of the main types of asset classes are equities, fixed income, and cash and equivalents. For individual investors, these are more commonly referred to as stocks, bonds and cash. An investor's asset allocation, or mix of asset types, is the foundation of portfolio construction.
What are the 4 groups of assets? ›
Assets are reported on a company's balance sheet. They're classified as current, fixed, financial, and intangible. They are bought or created to increase a firm's value or benefit the firm's operations.
What is the 4 asset portfolio? ›
There are four main asset classes – cash, fixed income, equities, and property – and it's likely your portfolio covers all four areas even if you're not familiar with the term. Your pension, for instance, may hold a mix of these four types of assets.
What are the 4 types of assets? ›
Common types of assets include current, non-current, physical, intangible, operating, and non-operating.
