What Is Portfolio Investment?
Portfolio investment is the purchase of securities such as stocks, bonds, mutual funds, and other financial assets by people or institutions to generate a return on investment. To diversify risk, it is necessary to disperse assets across several asset classes and industries.
Definition 2
According to renowned economist Harry Markowitz, "Portfolio theory seeks to provide an answer to the following question: how should an individual allocate his [or her] wealth among the available securities?"
More Thorough Understanding of the Term
Portfolio investing is selecting a mix of investments intending to achieve a balance of risk and return. Investors build portfolios by picking assets expected to provide profits while reducing potential downside. Diversification is essential to portfolio investment since it spreads the investment over many asset classes and businesses, lowering the risk associated with a single security.
Types of Portfolio Investments
A portfolio can be built in various methods based on the investor's objectives, risk tolerance, and investment horizon. Some common portfolio investments include:
- Equity portfolios
- Fixed-income portfolios
- Balanced portfolios
- Growth portfolios
- Value portfolios
- Index portfolios
Equity portfolios
A fixed-income portfolio comprises bonds and other fixed-income instruments that provide a regular income stream, whereas an equity portfolio includes equities of companies with solid growth potential.
Balanced portfolios
A balanced portfolio combines equity and fixed-income securities to balance risk and return. A balanced portfolio often consists of equities, bonds, and other fixed-income instruments in a proportion determined by the investor's risk tolerance, financial goals, and time horizon. A well-balanced portfolio offers investors reasonable long-term growth potential while minimizing downside risk.
Growth portfolios
A growth portfolio is a kind of investment portfolio made up of stocks from firms with the potential for considerable profit growth. Growth portfolios are popular among investors willing to take higher levels of risk because these companies are predicted to grow faster than the market average.
Value portfolios
A value portfolio is an investment portfolio that includes securities from companies that the market believes are undervalued. Value investors choose companies with good fundamentals, such as a low price-to-earnings ratio, a high dividend yield, and a solid balance sheet.
Index portfolios
An index portfolio is a type of investment portfolio that attempts to mimic the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. Instead of picking individual equities, an index portfolio invests in a diverse selection of stocks that comprise the index. Index portfolios expose investors to the broader market and are a suitable choice for individuals who wish to invest in diverse stocks while minimizing risk.
Example
The investor can build a balanced portfolio by investing 60% in equities and 40% in fixed-income assets. The portfolio's equity component may comprise equities of companies with a track record of consistent growth. In contrast, the fixed-income part may include high-quality bonds and other fixed-income assets.