Having an investment portfolio is an important part of managing your finances. A portfolio can provide a varied collection of investments to help you pursue financial goals, such as saving for retirement, and have a mix of assets that lower your risk and increase return potential.
There are three types of portfolios to consider—equity, balanced, and fixed income.
Equity Portfolios
Equity portfolios hold stocks and/or stock mutual funds. They tend to be more volatile than other types of portfolios, but can offer higher return potential over the long-term.
One benefit of investing in equity portfolios is having access to companies and industries you wouldn’t be able to access otherwise, such as the latest and most innovative technology or the best companies in their respective industries. You can also benefit from their outperformance and the diversification they provide. If you feel comfortable taking on more risk and investing in stocks, equity portfolios can help you reach longer-term financial goals.
Putting some money in a stock mutual fund is a good way to start building an equity portfolio. When investing in stocks directly, it’s important to create a well-diversified portfolio made up of stocks from different industries and companies.
Balanced Portfolios
Balanced portfolios vary in their investment mixes, but typically hold a blend of stocks, bonds, and other investments, such as cash and real estate investment trusts (REITs). This mix works to decrease the risk and volatility of a portfolio. Balanced portfolios can offer the best of both worlds—growth potential and income.
With the right mix of investments, you can get a portfolio that strives to preserve capital by lowering portfolio volatility while still generating income and capital gains. Balanced portfolios can also help achieve diversification due to the combination of investments they hold.
They are intended to provide investors with a long-term solution that allows their money to grow over the course of their lifetime. If a balanced portfolio is something you’re considering, be sure to invest in a mix of stocks, bonds, and cash that matches your overall investment objectives and tolerance for risk.
Fixed Income Portfolios
Fixed income portfolios typically hold only bonds, such as government, corporate, or municipal bonds. The aim of a fixed income portfolio is to generate income without a lot of volatility.
Fixed income portfolios offer a steady stream of income from investments that aren’t as volatile as stocks. Bonds also provide more risk-free investment in the form of tax-free municipal bonds, creating a balance between less risky investments such as bonds and the riskier strategy of investing in the stock market. However, it’s important to understand that bonds offer less return potential than stocks in exchange for the lower risk.
It’s also important to note that bond prices can change as interest rates change, resulting in losses if you must sell your bonds.
Conclusion
When building a portfolio, it’s important to understand the different types available and their associated risk levels. Equity portfolios offer higher return potential, balanced portfolios offer an equal mix of investments, and fixed income portfolios offer the lowest risk option. You should choose the right portfolio for your individual needs and risk tolerance.
Doing so will help ensure your investments are properly diversified to meet your financial goals.