A portfolio is a collection of investments designed to (hopefully) avoid the risk of relying on a single investment.
Planting For The Future
Say you want to plant a flower garden, but can only afford one seed packet (they cost $10 apiece). And since it’s your first garden, you have no idea what flowers will grow well in your yard.
Should you spend $10 on a packet with seeds for only a single type of flower? No! Because there’s a big risk that any single flower type just might not grow in your yard.
So instead, you decide to buy a ‘mixed seed’ packet, containing seeds from multiple flower varieties.
This is the idea behind portfolios. We’ll call this your seed portfolio.
You quickly discover there are lots of seed portfolio options available. You can buy wildflower mix packets, perennial seed mix packets, color-based mix packets, shade garden mixes, cut-flower mixes, the list goes on and on. You can even get a garden store to make a custom-mix seed packet for you.
Like investment portfolios, can can choose (or design) almost any seed mix packet you want: depending on your goals for the flowers, and how much risk you want to take (that some or all might not grow).
Investors like to debate how many investments have to be in a portfolio for it to work well. Some people think just a few investment holdings can be fine, if they’re the right ones. While others may prefer more diversified portfolios with dozens or even hundreds of holdings.
Picking a portfolio (or seed mix) is the heart of investing, whether you’re investing in your financial future or your future garden. It’s a balance of managing the risk and returns (rewards) of your investment. And there’s often endless possibilities to choose from.