What Is Portfolio Investment?

A portfolio investment is a hands-off or passive investment of securities in a portfolio, and it is made with the expectation of earning a return. This expected return is directly correlated with the investment's expected risk. Portfolio investment is distinct from direct investment, which involves taking a sizable stake in a target company and possibly being involved with its day-to-day management.

A portfolio investment is a strategic investment strategy while a tactical approach involves actively buying and selling securities over short time periods.

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Understanding Portfolio Investment

Understanding Portfolio Investment

Portfolio investments can span a wide range of asset classes such as stocks, government bonds, corporate bonds, Treasury bills, real estate investment trusts (REITs), exchange-traded funds (ETFs), mutual funds and certificates of deposit. Portfolio investments can also include options, derivatives such as warrants and futures, and physical investments such as commodities, real estate, land, and timber.

The composition of investments in a portfolio depends on a number of factors. Some of the most important include the investor’s risk tolerance, investment horizon and amount invested. For a young investor with limited funds, mutual funds or exchange-traded funds may be appropriate portfolio investments. For a high net worth individual, portfolio investments may include stocks, bonds, commodities, and rental properties.

Modern portfolio theory (MPT) is a common method for optimizing risk-return characteristics of a portfolio investment.

Portfolio investments for the largest institutional investors such as pension funds and sovereign funds include a significant proportion of infrastructure assets like bridges and toll roads. Portfolio investments for institutional investors generally need to have very long lives so that the duration of their assets and liabilities match.

Key Takeaways

  • A portfolio investment is a diversified approach to investing that seeks a return.
  • A portfolio investment is long-term and passive (buy-and-hold) strategy.
  • Risk tolerance and time horizon are key factors in building any portfolio investment.

Impact of Risk Tolerance, Age and Time Horizon

The investments that are made in a portfolio are dependent on the investor's individual circumstances. Those with a greater risk tolerance may favor investments in stocks, real estate, international securities, and options, while more conservative investors may opt for government bonds and the stocks of large well-known companies.

These risk preferences should also be weighed against the investor's goals and time horizon. A young person saving for retirement may have 30 years or more to save but isn't comfortable with the risks of the stock market. This individual may want to favor a more conservative mix of portfolio investments despite the long time horizon. Conversely, individuals with high-risk tolerances may want to avoid large allocations to riskier growth stocks if they are nearing retirement age. A progression to a portfolio of more conservative investments is generally recommended as an investment goal nears.

Portfolio Investments for Retirement

Investors saving for retirement should focus on a diversified mix of low-cost investments for their portfolios. Index funds have become popular in individual retirement accounts (IRAs) and 401(k) accounts, due to their broad exposure to a number of asset classes at a minimum expense level. These types of funds make ideal core holdings in retirement portfolios. Those wishing to take a more hands-on approach may tweak portfolio allocations by adding additional asset classes such as real estate, private equity, and individual stocks and bonds to their portfolio mix.