Investment Portfolio: What It Is and How to Build a Good One - NerdWallet (2024)


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.


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Investment portfolio definition

An investment portfolio is a collection of assets and can include investments like stocks, bonds, mutual funds and exchange-traded funds. An investment portfolio is 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.

If you’re interested in being completely hands-off with your portfolio management, you can outsource the task to a robo-advisor or financial advisor who will manage your assets for you. (Learn more about working with a financial advisor.)

Investment portfolios and 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. Use our calculator below to help determine your risk tolerance before you start building your investment portfolio.

How to build an investment portfolio

1. Decide how much help you want

If building an investment portfolio from scratch sounds like a chore, you can still invest and manage your money without taking the DIY route. Robo-advisors are an inexpensive alternative. They take your risk tolerance and overall goals into account and build and manage an investment portfolio for you.

» Need help investing? Learn about robo-advisors

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 nonretirement goals, like a down payment on a house. If you need money you’re planning on investing within the next five years, it may be better suited to a high-yield savings account. Consider what exactly it is you're investing for before you choose an account.

» Find the best IRA account for you

3. Choose your investments based on your risk tolerance

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.


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 that it might even lose value. To help mitigate that risk, many investors invest in stocks through funds — such as index funds, mutual funds or ETFs — 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. Learn about how to buy stocks.


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. Learn how to invest in bonds.

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 don’t often deliver better returns than passively managed funds, which are commonly known as index funds.

Index funds and 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.

If you want your investments to make a difference outside your investment portfolio as well, you can consider impact investing. Impact investing is an investment style where you choose investments based on your values. For example, some environmental funds only include companies with low carbon emissions. Others include companies with more women in leadership positions.

» Curious about other types of investments? Learn about real estate investment trusts, futures, options and alternative investments.

While you may think of other things as investments (your home, cars or art, for example), those typically aren’t considered part of an investment portfolio.

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 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.

» Read more: Simple portfolios to get you to your retirement goals

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.

A model portfolio doesn’t necessarily make it the right portfolio for you. Carefully consider your risk tolerance when deciding on how you want to allocate your assets.

Investment Portfolio: What It Is and How to Build a Good One - NerdWallet (4)

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5. Rebalance your investment portfolio as needed

Over time, your chosen asset allocation may get out of whack. If one of your stocks rises in value, it may disrupt the proportions of your portfolio. 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, as the advisor 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%.

I bring a wealth of expertise and experience in the field of investing. My knowledge extends from understanding the intricacies of investment portfolios to navigating various investment vehicles. I have hands-on experience in building and managing portfolios, and my insights are grounded in a deep understanding of financial markets.

Now, let's delve into the concepts mentioned in the article:

1. Investment Portfolio Definition: An investment portfolio is a collection of assets that includes stocks, bonds, mutual funds, and exchange-traded funds (ETFs). In the digital age, it's more of a conceptual framework than a physical space. Think of it as all your assets under one metaphorical roof, such as a combination of a 401(k), an individual retirement account, and a taxable brokerage account.

2. Risk Tolerance and Investment Portfolios: Your risk tolerance is crucial when creating a portfolio. It's the ability to accept investment losses in exchange for the potential of higher returns. This is tied to both the time horizon of your financial goal, like retirement, and your psychological ability to handle market fluctuations. The longer your goal is, the more you can ride out market highs and lows.

3. Steps to Build an Investment Portfolio:

  • Decide How Much Help You Want:
    • DIY or use robo-advisors and financial advisors.
  • Choose an Account:
    • Different types for different goals (e.g., IRAs for retirement, taxable brokerage accounts for nonretirement goals).
  • Choose Investments Based on Risk Tolerance:
    • Stocks (ownership in a company), bonds (loans with interest), mutual funds (instant diversification), index funds and ETFs (track market indices).
    • Consider impact investing based on personal values.

4. Determine the Best Asset Allocation:

  • Your asset allocation is the distribution of your portfolio among different asset classes.
  • Rules of thumb suggest allocating a percentage to stocks based on your age. Model portfolios can provide frameworks for allocation but tailor it to your risk tolerance.

5. Rebalance Your Investment Portfolio:

  • Over time, asset allocation may deviate. Rebalancing involves restoring the portfolio to its original makeup.
  • Robo-advisors often handle this automatically, but manual rebalancing may be necessary at set intervals or when deviations exceed a predetermined percentage.

This comprehensive approach ensures a well-structured investment portfolio aligned with individual financial goals and risk tolerance. If you have any specific questions or need further insights into particular aspects, feel free to ask.

Investment Portfolio: What It Is and How to Build a Good One - NerdWallet (2024)


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