The strength of an investor's portfolio may determine when she can retire, how much income she has and what decisions about investing she should make in the future. But assembling and managing a successful portfolio is no easy task. Before you can understand your portfolio, you need to know what goes into it and what your investment goals are.
A portfolio is simply a collection of investments. A business or financial entity may have an investment portfolio, but in most cases a portfolio refers to the investments that an individual owns at any given time. To start a portfolio, you must purchase or receive as gifts more than one type of investment product. These may include cash, stock, bonds, mutual funds, certificates of deposit and commodities futures, among other investments.
Managing a Portfolio
Individuals can choose to manage their own portfolios by buying and selling investment products as they choose. In other cases, individuals hire portfolio managers or financial planners to study their investments and make recommendations about how to invest in the future. Some portfolio management is very active and involves buying and selling investments rapidly. However, some investors prefer to establish a portfolio and allow it to remain largely unchanged over time. The costs associated with managing a portfolio are generally tax deductible as investment expenses.
The goal of a portfolio is to create a source of investment income and growth while keeping the initial value of investments intact. There are numerous strategies to reach this goal. Most portfolios attempt to balance risk by including highly volatile investments, such as stock, with more conservative, safe investments, such as bonds and cash. Diversification refers to the basic strategy of spreading out the value of a portfolio over many different investments so growth in just one of the investments will mean a profit for the portfolio as a whole.
Tracking and Analysis
Investors have many tools at their disposal for tracking and analyzing a portfolio. Software programs allow investors to track the value of individual investments and compare them to similar investments to determine whether they are successful and worth keeping. These programs also project future income and growth based on market trends and past performance. Consulting with professionals and learning about different forms of investments that you might not already own are additional tools for understanding your portfolio and being ready to make constructive management decisions.