A portfolio is simply what invested assets you’re holding in total, and how they’re divided. Think of your holdings as a banana cream pie — or whichever objectively inferior pie you prefer. This pie is divided into different sized slices that coincide with your various holdings — be they stocks, bonds, mutual funds, ETFs or liquid cash equivalents.
How the pie is divided will say a lot about your risk tolerance. If your pie is made up of huge slices that together reflect an investment in large cap stocks, municipal bond funds, and cash reserves, you should expect very low volatility, and relatively slow growth. If your pie shows a large percentage of your money in mid and low cap stocks and relatively tiny slices of cash reserves and bond funds, you’ve put together an inherently riskier portfolio but one with potential for higher gains. Amateur investors should assess their risk tolerance, figure out their financial goals and when they’ll need to access their funds, and divide their pie accordingly.
We strongly suggest that however your ideal pie looks, you should avoid investing heavily in individual stocks since humans are notoriously terrible stock pickers. To have a truly diversified portfolio, you’d be much better off investing in things that for one price will offer you exposure to many, many stocks and other asset classes. Buying mutual funds is one way to buy many stocks at once. Our personal favorite investment vehicle are ETFs, short for exchange traded funds, which, through investing in a wide assortment of equities, mirror stock market indexes like the S&P 500, and, unlike mutual funds, feature exceptionally low management fees.