Think of your holdings as a pie — imagine it as whichever flavour you like, or apple pie, which you might as well just admit is objectively the best pie of them all. This pie is divided into different sized pieces that coincide with your various stock holdings. Since individual stocks can be more, or less, volatile, how your portfolio is divided will say a lot about your risk tolerance. Large cap stocks, meaning stocks in huge, often multinational corporations, tend to be safer, less volatile investments, whereas small-cap stocks, or stocks in companies that are smaller and more prone to big daily gains and losses, are inherently riskier for investors.
All investors should strive to create a portfolio that matches their risk tolerance. But here’s one huge caveat: we would highly discourage you from investing the bulk of your money in a pure “stock portfolio” altogether, since the term refers to a collection of individual equities — and humans, especially untrained ones, tend be not-very-good individual stock pickers. In order to have truly diversified holdings, you’d be much better off investing in things that for one price will offer you exposure to many, many stocks or other asset classes.
Buying mutual funds is one way to buy many stocks at once. Another thing to consider is Wealthsimple’s personal favourite investment vehicle — ETFs, which, through investing in a wide assortment of equities, mirror stock market indexes like the S and P 500, and, unlike mutual funds, boast exceptionally low management fees. Through these more diversified investment vehicles, you’re better able to create a pie that reflects your overall risk tolerance — with a mixture of stock and bond funds as well as stable cash equivalent funds.