What is a Financial Portfolio?
In general, a portfolio is just an organized collection of data created to serve a certain purpose.
This beautiful word appeared in the English language in the 18th century and it was an adaptation of a much older Italian word ‘portafoglio’ (porto folio, port folio) which means ‘to carry’ something. Although this word had many meanings back then, usually it was used to describe a briefcase carried by a person, with little regard to the contents of such a briefcase.
What is a Financial Portfolio?
In business and finance, a portfolio is a collection of investments held by a person or an organization in order to achieve certain financial goals, such as to make money or to avoid losing it. To understand the idea of a financial portfolio imagine a pie that was sliced into many pieces: some of them might be smaller and some are quite big. Every piece of such a pie is like an asset in a financial portfolio: all of those possibly uneven parts can be put together so it would form an object that has a bunch of unique properties, that are not present in any of its parts if we look at them in isolation.
If you’re familiar with accounting, you would easily understand the concept of a portfolio because it’s very similar to the asset side of the balance sheet, the only difference is that, in case of a financial portfolio, all of those assets are supposed to grow in value.
➤ Read also: What are Assets in Financial Accounting?
What Assets Can be Held in a Portfolio?
A financial portfolio can contain a wide range of assets, such as:
- Cash in different currencies
- Shares of the public companies
- Shares of various funds (hedge funds, ETFs and so on)
- Bonds (sovereign as well as corporate)
How Much Money do I Need to Create a Real Portfolio?
You don’t need a lot of money in order to start investing because the entry barrier is quite low ($50, $100, $500 – $1000), although it might make more sense to enter the market with a larger sum of money, because of various transaction fees that can bite you because you need to make several transactions in order to buy a certain mix of assets which would help you to diversify your portfolio. Several thousands dollars might be a more proper sum to start investing or trading.
Who Can Hold and Manage a Financial Portfolio?
Any active and passive investor holds a certain portfolio.
Even if someone owns just a single asset, it’s still called a portfolio (it just lacks proper diversification).
Common portfolio holders are:
- Private individuals
- Hedge Funds
- Investment Firms, Public Companies & Banks
- Pension Funds
- Other Financial Institutions & Institutional Investors
A portfolio can be discretionary or non-discretionary.
Discretionary portfolios are managed by a professional (investment counselor, wealth manager) and all of the buy and sell decisions are made on behalf of the client. Non-discretionary portfolios are managed directly by their holders without a middleman (except the broker).
What is The Main Goal of a Portfolio Manager?
The main goal of a portfolio holder or manager is to maximize financial returns and to minimize risk. This goal can be achieved by making wise investment decisions, proper asset allocation, sensible time horizon and good market timing.
How to Evaluate a Portfolio?
It’s important to have some kind of yardstick in order to be able to compare different portfolios and to measure their performance. Historically, you can always tell which assets performed well compared with other assets that didn’t show great returns during the same period.
Here is an example: let’s say that Mark created portfolio A with just one asset - gold. At the same time, his friend, John, came up with a different investment idea and he created a portfolio B with two assets: gold and a bond with a low guaranteed return. In this case, portfolio A has a higher risk but it also has a greater potential capital gain as well. Portfolio B, however, is less risky (it is hedged with a bond) but its potential capital gain is lower. Imagine that one year forward we have a chance to look at both of those portfolios and it turned out that John with portfolio B made more money (or lost less money in some cases) because gold’s price has fallen sharply.
The conclusion is simple: picking portfolio B was a better idea than picking portfolio A but no one knew that one year ago.
The main problem with the portfolio management is called ‘Multi-objective optimization’: it’s when you have to take into account more than one variable (risk and return in our case) to come up with the optimal set of assets in your basket. If a portfolio A has a higher return and lower risk than a portfolio B, the former portfolio can be called a ‘Pareto-optimal’.
The most popular benchmark to evaluate a portfolio is S&P 500 index which shows how the American marked performed in general. A good stock portfolio is supposed to beat the S&P 500 and if a portfolio manager can’t do that, it might make sense to fire him and buy a low-cost S&P 500 ETF instead.
This page doesn't show ads and the reasons are simple:
- Most people don't want to see ads (what a surprise)
- Ads can track you and violate your privacy
- Ads is the main reason why many websites are so slow
If you find this content valuable or you want to see more content like this, you can leave a tip with bitcoin:3LW2Q71yaeaKM4ZxVdeMkLViRGp7HEiJDS