What is a portfolio?

Core essentialsPoint

The essence of a portfolio is to spread risk by not putting all your eggs in one basket.

Portfolio has three characteristics: diversification, weak correlation and personalization.

The age can be used as a reference factor for the construction of investment portfolio.

Detailed explanation of concept

A portfolio is a basket of assets that can include stocks, bonds, financial derivatives, precious metals, cash and other assets.

As we often hear: don't put all your eggs in the same basket, for the same reason, don't buy all your money into the same asset.

Put the eggs in different baskets, even if the eggs in one basket are broken, the other eggs will be safe and sound. Similarly, the core purpose of building a core portfolio is to spread risk. A single asset may produce relatively large fluctuations, and if you hold a portfolio composed of many types of assets, the fluctuations of various types of assets offset each other, you can reduce the overall risk of the portfolio.

Three characteristics

In general, a portfolio has three characteristics.

First, dispersion. Only by buying different types of assets, reducing the weight of a single asset and diversifying the investment, can the risk of the investment portfolio be reduced.

Second, weak correlation. The correlation of the assets in the portfolio is relatively poor. For example, for stocks, if you buy Maotai and Wuliangye of the liquor industry at the same time, there is a great correlation between the rise and fall of the two stocks, which will lose the meaning of risk diversification.

Third, personalization. The composition of assets in the portfolio needs to vary from person to person. If you have a high risk preference, you can allocate more equity assets such as stocks. If you have a low risk preference and are extremely averse to losses, you can allocate more low-risk assets such as bonds. Even keep cash.

How to build a combination

How to build a portfolio? Here's a relatively simple way to use an interesting little formula: 100-age, and the number is the proportion of money invested in equity assets such as stocks or stock funds.

The logic of this formula is that the younger the age, the stronger the ability to make money, the higher the risk tolerance, and the more high-yield and high-risk assets can be allocated. For example, if you are 30 years old, you can buy 70% of stocks or equity funds, and the remaining 30% allocate bonds, money funds, gold and other relatively low-risk assets.

At the same time, there is also a need for decentralized allocation within certain types of assets. For example, stock assets, you can buy different stocks to spread the risk, it is best to select different industries and types of stocks.