How to Build a Strong Investment Portfolio

In our last post, we went over what an investment is and what stocks are. But, how do we actually build a portfolio to manage our money as best as possible? What defines a strong portfolio and how do they vary from person to person?

First, let's get into what a portfolio even is. A portfolio can be thought of as a collection or a combination of assets that someone owns. In finance, and more specifically the stock market, a portfolio refers to all the different stocks and shares of stock you may own in an account. For example, if I owned 10 shares of Apple, 20 shares of McDonalds, and 5 shares of Costco, I would say my portfolio consists of Apple, McDonald's, and Costco (the exact numbers of shares are arbitrary here). Also, portfolios aren't restricted to stocks and if I were to own another type of asset, like bonds, that would also be part of my portfolio. As for understanding the concept of a financial portfolio, that's basically all you need to know!

Next, what even is the point of owning shares in multiple different stocks instead of just one? Referring to the example above, instead of owning shares of McDonald's and Costco, why not just invest that money into buying more Apple shares instead? This is one of the most important topics in investing: diversification. In managing your money (and in life), you almost never want to put all of your eggs in one basket. To understand the possible consequences, let's take the example above where instead of buying shares of McDonald's and Costco, I put all of my money into Apple shares and hold them. As a case study, let's say that over the next decade, Apple were to fall behind in the tech world, lose market share, and their revenue substantially decreased. By 2035, their stock price is half of what it is now. If I invested all of my money into Apple now and that were to take place, I would have lost 50% of my investment across 10 years. Not only are those very negative returns, but I would even be better off by just letting my money sit in cash than investing it. Or, even better, invest a small portion of my portfolio into Apple now (if I'm truly confident in its long-term growth) and spread the remaining money across other assets.

This is not just for Apple but if any of my individual investments lose value in the long run, my portfolio can still experience solid growth because of the investments that turn out to be winners. That is the power of diversification. Instead of betting the farm on one company's success, your portfolio can still experience solid, stable growth in the long run if you allocate your money across multiple different investments.

Overall, construct a strong, long-term portfolio for your financial needs lies in diversifying well. In fact, there are multiple types of portfolios that are defined based on their allocation, such as the 60/40 portfolio. This simply refers to investing 60% of your money in stocks and 40% in bonds, which can help reduce risk during bear markets.

In the next post, we'll discuss why adding other types of assets (ETFs, bonds, real estate, derivatives, etc.) to your portfolio can be beneficial. Thank you for reading!