Investor Jargon: Portfolio
A lot of investing-related language can be straight-up confusing. This can make ownership seem scary and much more complex than it actually is. We’d rather ownership be approachable, so we’re breaking down some of the common terms you might see or hear.
What's a portfolio?
A portfolio is a formal way to describe the investments you hold, like bonds, stock, or cash equivalents. In some ways, it can be like a reflection of you—your age, your financial goals, your values.
What's a diversified portfolio?
Having a diversified portfolio means you’ve spread your money across a variety of investments that haven’t historically moved the same amount in the same direction. That way, if one drops in value, the others might make up for it by either increasing in value or not dropping as much.
It’s not about ensuring gains or guaranteeing there won’t be losses. In fact, the goal of diversification isn’t necessarily even to boost performance. Instead, it can help improve returns for the level of risk you’re comfortable with (aka your risk tolerance, more on that in a minute).
A diversified portfolio may have:
- A mix of asset categories—a formal way to refer to stocks, bonds, cash equivalents, or other investments
- A mix of investments within each of those categories
Basically, the idea is don’t put all your (money) eggs in one (investment) basket.
All of this—figuring out what investments to include in your portfolio to balance risk and reward—is part of a common strategy called asset allocation.
What's asset allocation
Asset allocation is a strategy that involves choosing investments that help balance risk and reward based on your financial goals, risk tolerance, and time horizon. Let’s talk about each of those pieces.
Personal financial goals: Pretty self-explanatory. Are you looking to save for long-term for something big, like retirement, or something smaller and shorter-term like a sweet vacation?
Risk tolerance: How able and willing are you to lose your original investment in the hope of higher returns? Folks with high-risk tolerance are more likely to hold more volatile investments in hopes of getting more reward. Risk and reward are typically inversely related. The most potentially rewarding investments are usually also the riskiest.
Time horizon: How long do you expect to invest in order to achieve your financial goals? That’s your time horizon. Folks with longer time horizons may be more comfortable taking on extra risk since they can wait out the ups and downs of the market. Folks with short time horizons, on the other hand, may take a more conservative approach.
What's the best portfolio?
There isn’t one.
Your portfolio is unique to you. What you own can be based on your financial goals and the companies you care about. The portfolio you have today won’t necessarily be the one you have in 5, 10, 20 years—it can change as the markets, your life, and your goals change.