Like any industry, investing has its own language. And one term people often use is "investment portfolio," which refers to all of your invested assets.
Building an investment portfolio might seem intimidating, but there are steps you can take to make the process painless. No matter how engaged you want to be with your investment portfolio, there’s an option for you.
What is an investment portfolio?
An investment portfolio is a collection of assets and can include investments like stocks, bonds and mutual funds. It's more of a concept than a physical space, especially in the age of digital investing, but it can be helpful to think of all your assets under one metaphorical roof.
For example, if you have a 401(k), an individual retirement account and a taxable brokerage account, you should look at those accounts collectively when deciding how to invest them.
How to build an investment portfolio
1. Decide if you want to do it yourself or get some help
If building an investment portfolio from scratch sounds like a chore, you don't have to do it yourself. Robo-advisors are an inexpensive alternative that factor in your risk tolerance and overall goals to build and manage an investment portfolio for you. (See our picks for the best robo-advisors.)
If you do want to build a portfolio yourself, online brokers are increasingly offering products that make it extremely easy. Previously, building a portfolio of different assets meant managing all those investments individually, too.
Brokers with strong portfolio-building tools
Of the brokers NerdWallet reviews, here are the ones that offer tools that make it simple to build your own portfolio.
Broker | Max number of assets | Price |
100, though users can request access to 150. | $3 per month on balances under $10K | |
50 | $4.99 per month | |
20 | $0.49 - $1.99 per recurring investment | |
10 | Free | |
25, though you can't build one from scratch. | Free | |
🤓 Nerd Tip: These are all examples of brokerage accounts, which you'll need in order to start investing. You can see our full list of the best brokerage accounts here. | ||
Using a financial advisor
If you want more than just investment management, an online financial planning service or a financial advisor can help you build your portfolio and map out a comprehensive financial plan.
2. Choose an account that works toward your goals
To build an investment portfolio, you’ll need an investment account.
There are several different types of investment accounts. Some, like IRAs, are meant for retirement and offer tax advantages for the money you invest. Regular taxable brokerage accounts are better for non-retirement goals, like a down payment on a house. Consider what exactly it is you're investing for before you choose an account.
3. Pick investments based on your risk tolerance
One of the most important things to consider when creating a portfolio is your personal risk tolerance. Your risk tolerance is your ability to accept investment losses in exchange for the possibility of earning higher investment returns.
Your risk tolerance is tied not only to how much time you have before your financial goal, such as retirement, but also to how you mentally handle watching the market rise and fall. If your goal is many years away, you have more time to ride out those highs and lows, which will let you take advantage of the market’s general upward progression.
After opening an investment account, you’ll need to fill your portfolio with the actual assets you want to invest in. Here are some common types of investments and their associated risks.
Stocks
Stocks are a tiny slice of ownership in a company. Investors buy stocks that they believe will go up in value over time. The risk, of course, is that the stock might not go up at all, or it might even lose value. To help mitigate that risk, many investors invest in stocks through mutual funds that hold a collection of stocks from a wide variety of companies. If you do opt for individual stocks, it’s usually wise to allocate only 5% to 10% of your portfolio to them.
Bonds
Bonds are loans to companies or governments that get paid back over time with interest. Bonds are considered to be safer investments than stocks, but they generally have lower returns. Since you know how much you’ll receive in interest when you invest in bonds, they’re referred to as fixed-income investments. This fixed rate of return for bonds can balance out the riskier investments, such as stocks, within an investor’s portfolio.
Mutual funds
There are a few different kinds of mutual funds you can invest in, but their general advantage over buying individual stocks is that they allow you to add instant diversification to your portfolio. Mutual funds allow you to invest in a basket of securities, made up of investments such as stocks or bonds, all at once. Mutual funds do have some degree of risk, but they are generally less risky than individual stocks. Some mutual funds are actively managed, but those tend to have higher fees, and they often underperform passively managed funds, which are commonly known as index funds.
Index funds and exchange-traded funds (ETFs) try to match the performance of a certain market index, such as the S&P 500. Because they don't require a fund manager to actively choose the fund's investments, these vehicles tend to have lower fees than actively managed funds. The main difference between ETFs and index funds is that ETFs can be actively traded on an exchange throughout the trading day, like individual stocks, while index funds can only be bought and sold for the price set at the end of the trading day.
» Learn more about index funds or ETFs, plus how to invest in them.
4. Determine the best asset allocation for you
So you know you want to invest in mostly funds, some bonds and a few individual stocks, but how do you decide exactly how much of each asset class you need? The way you split up your portfolio among different types of assets is called your asset allocation, and it’s highly dependent on your risk tolerance.
You may have heard recommendations about how much money to allocate to stocks versus bonds. Commonly cited rules of thumb suggest subtracting your age from 100 or 110 to determine what portion of your portfolio should be dedicated to stock investments. For example, if you’re 30, these rules suggest 70% to 80% of your portfolio be allocated to stocks, leaving 20% to 30% of your portfolio for bond investments. In your 60s, that mix shifts to 50% to 60% allocated to stocks and 40% to 50% allocated to bonds.
When you’re creating a portfolio from scratch, it can be helpful to look at model portfolios to give you a framework for how you might want to allocate your own assets. Take a look at the examples below to get a sense of how aggressive, moderate and conservative portfolios can be constructed.
5. Rebalance your investment portfolio as needed
Over time, your chosen asset allocation may get out of whack. Rebalancing is how you restore your investment portfolio to its original makeup. (If you’re using a robo-advisor, you probably won’t need to worry about this, since it will likely automatically rebalance your portfolio as needed.) Some investments can even rebalance themselves, such as target-date funds, a type of mutual fund that automatically rebalances over time.
Some advisors recommend rebalancing at set intervals, such as every six or 12 months, or when the allocation of one of your asset classes (such as stocks) shifts by more than a predetermined percentage, such as 5%. For example, if you had an investment portfolio with 60% stocks and it increased to 65%, you may want to sell some of your stocks or invest in other asset classes until your stock allocation is back at 60%.
Explore more on
