An investor’s portfolio reflects the type of investor that they are – including the risks they are willing to take and the areas that they consider themselves to be more knowledgeable. We break down just what it means to hold a portfolio. Your portfolio should be designed with your financial goals and appetite for risk in mind. A ‘portfolio’ essentially describes the investments that you hold, for example stocks, bonds and/or cash.
Your portfolio’s ‘asset allocation’ represents the different investments you have. If you have £7,000 in stocks and £3,000 in bonds, then your overall portfolio of £10,000 has a 70/30 asset allocation (70% in stocks and 30% in bonds). Different investors will have different balances in their portfolio’s asset allocation. Evidence suggests that a diversified and balanced portfolio holding a broad range of stocks, bonds and cash will serve you best. When deciding the asset allocation for your portfolio, it’s important to bear in mind your time horizon, financial goals, and the amount of risk that you are prepared to tolerate.
Due to our changing requirements at different life stages, a portfolio you might hold when you are younger will likely differ to what you hold when you are closer to retirement. Younger investors, for example, may place more weight in their portfolio towards stocks. While stocks are more volatile than bonds, for example, the benefit of a longer time horizon means that they are better placed to ride out any potential short-term volatility. With older age, you’ll want more conservative and certain returns, therefore probably shifting your portfolio to be more heavily weighted in bonds and cash.