Portfolio

A portfolio is the collection of all financial investments owned by an individual, institution, or investment fund. A well-constructed portfolio typically includes a mix of different asset classes - stocks, bonds, cash, real estate, and sometimes alternative investments - designed to achieve specific financial goals while managing risk. The foundation of portfolio management is diversification - spreading investments across different assets to reduce risk. The idea is that different investments perform differently under various market conditions. When stocks decline, bonds might rise, and vice versa. By holding a mix of assets, investors can smooth out their overall returns and reduce the impact of any single investment's poor performance. Asset allocation - deciding how much to invest in each asset class - is one of the most important portfolio decisions. A common rule of thumb suggests holding your age in bonds and the remainder in stocks, though individual circumstances vary. Younger investors with longer time horizons can typically afford more aggressive allocations weighted toward stocks, while those approaching retirement often shift toward more conservative, income-focused portfolios. Within each asset class, further diversification is important. A stock portfolio should include companies across different sectors, sizes, and geographies. A bond portfolio might include government bonds, corporate bonds, and bonds with different maturities. This diversification within asset classes provides additional protection against specific risks. Portfolio rebalancing is the process of periodically adjusting your holdings to maintain your target asset allocation. As some investments outperform others, your portfolio can drift from its intended allocation. Rebalancing involves selling some winners and buying some laggards to restore balance. Modern portfolio theory, developed by Harry Markowitz, provides a mathematical framework for constructing portfolios that optimize the trade-off between risk and return. This work earned Markowitz a Nobel Prize and forms the foundation of how professional investors think about portfolio construction today.