What is an investment portfolio?

Key Points

The essence of a portfolio is not to put all your eggs in one basket, thereby diversifying risk.

Portfolios have three characteristics: diversification, weak correlation, and personalization.

When building a portfolio, factors such as individual's age, risk preference, etc., can be taken into consideration.

Concept Explanation

A portfolio is a combination of assets in one basket, which can include stocks, bonds, financial derivatives, precious metals, cash, and other types of assets.

As we often hear, 'Don't put all your eggs in one basket,' similarly, do not invest all your money in the same asset.

By putting eggs in different baskets, even if eggs in one basket break, the other eggs remain unharmed. Similarly, the core purpose of building a core portfolio is to diversify risk. A single asset may experience significant fluctuations, but if a portfolio is composed of multiple types of assets, the fluctuations of various assets offset each other, reducing the overall risk of the portfolio.

Three main characteristics.

Generally, an investment portfolio has three main characteristics.

First, diversification. Only by purchasing different types of assets, reducing the weight of a single asset, and diversifying investments, can the risk of the investment portfolio be reduced.

Second, low correlation. The assets within the investment portfolio should have poor correlation. For example, for stocks, if you simultaneously buy baijiu industry Moutai and Wuliangye, the correlation between these two stocks is significant, which loses the significance of risk diversification.

Third, customization. The composition of assets in the investment portfolio needs to vary according to the individual. If you have a high risk preference, you can allocate more to stocks and other equity assets. If you have a low risk preference and extremely dislike losses, you can allocate more to bonds and other low-risk assets, or even hold cash.

How to build a portfolio.

How to build an investment portfolio? Here is a relatively simple method, using an interesting little formula: 100 - age, the resulting number is the percentage of funds to be invested in stocks or stock funds and other equity assets.

The logic behind this formula is that the younger you are, the stronger your earning ability, the higher your risk tolerance, and the more you can allocate to some high-return high-risk assets. For example, if you are currently 30 years old, you can buy 70% of stocks or stock funds, and allocate the remaining 30% to bonds, mmf, gold, and other relatively low-risk assets.

At the same time, within a certain type of assets, it is also necessary to diversify the allocation. For example, for stocks assets, risk can be diversified by buying different stocks, preferably selecting stocks from different industries and types.