How to start building and managing your portfolio
What’s a portfolio?
Being an investor means building and managing a portfolio. Fair enough, but how do you do that? Let’s look at the basics.
A portfolio is really just a list of your investments. While all your investments taken together might be considered your overall portfolio, investors can have separate portfolios for different purposes—a retirement portfolio, a trading portfolio, and a college fund portfolio, for example.
If a portfolio is a list of investments, how do you pick what’s on that list? This is where two closely related ideas come into play: asset allocation and diversification.
Asset allocation: Your mix of investments
Your asset allocation is the mix of different types of investments that you hold. Typically, investors talk about three main types of investments, or asset classes:
- Stocks, which are also called equities
- Bonds, also known as fixed income securities
- Cash and cash equivalents
Be aware that there are other asset types collectively known as alternatives, which include real estate, commodities, and more.
These different types of investments have different degrees of risk and different potential rewards. How you mix them determines your portfolio’s overall risk/reward balance, which is really your investment strategy. It could be:
This will typically mean a high percentage of cash and bonds in the portfolio, with the main goal of preserving existing wealth. This is a low risk approach because cash amounts don’t decrease, and while the value of a bond investment may change from day to day, you’ll generally get your original investment amount back, plus interest payments, if you hold a bond until it matures.
This portfolio will typically have more stocks than the conservative approach and aim for some growth with moderate risk.
An aggressive portfolio will generally have a high percentage of stocks and a smaller proportion of cash and bonds. The stocks provide a greater potential to make profits, but also greater risk and potential for losses.
Many factors can influence how you allocate your assets and build your portfolio. Two important ones are your risk tolerance and your investing timeframe. Another is diversification.
Diversification means putting your money in a variety of different investments to manage or potentially reduce your risk. Instead of buying stock in only one company or one industry, you look to buy stocks in many companies of different sizes, in different industries, or different locations. The same idea applies to asset classes. You might make investments not only in stocks but also in bonds, cash, or possibly even alternatives.
This may reduce risk because if your portfolio is diversified—that is, you’ve spread your eggs among many baskets—it’s not as vulnerable to taking a big hit if things go wrong for a single company or industry.
So how do you go about building a diversified portfolio? One way is to invest in exchange-traded funds (ETFs) and mutual funds, which provide access to multiple stocks and bonds and invest broadly in the markets. Here are three simple ways to find and invest in ETFs and mutual funds:
Diversification means putting your money in a variety of different investments to manage or potentially reduce your risk.
- E*TRADE from Morgan Stanley screeners. We have a range of screeners and other research tools to help you discover the ETFs and mutual funds that are right for you.
- Prebuilt portfolios. These are E*TRADE educational tools that ask you to choose your investment strategy—conservative, moderate, or aggressive—and then show you selections of ETFs or mutual funds that you can purchase to build your portfolio.
- Core Portfolios. This option provides easy, automated ETF investing backed by the E*TRADE Capital Management investment strategy team. You answer questions about your risk tolerance, goals, and timeframe, and we build your portfolio and manage your investments day-to-day for a fee. You’ll always stay fully informed and in control of your investment strategy.
Managing your portfolio
Once you’ve built a diversified portfolio that fits your goals, there are some things you should keep an eye on and some management tasks you may want to do from time to time:
- Check performance. Every so often, check to see how your investments are doing. How are they performing compared to the broader markets?
- Stay informed. Keep an eye on news and events related to companies and industries that you’re invested in. Are there trends or possible future developments that could affect your investments?
- Monitor your asset allocation. Periodically, take a close look at your investment mix to make sure it’s still aligned with your investment goals and risk tolerance. E*TRADE provides tools to help you analyze your portfolio and asset allocation.
- Rebalance. As some of your investments rise in value, and others fall, the balance in your portfolio can drift away from your original target. You may need to periodically rebalance it to ensure your mix of assets stays where you want it to.
- Adjust to life changes. Over time, your appetite for risk may change. For example, it’s common for people nearing retirement to try to reduce risk and preserve their savings. Other life changes like having children, getting a raise, or changing jobs can also impact your investing goals. In those cases, you should think about whether your asset allocation mix needs to change.
Understanding these basic principles is the first step in building an investment portfolio. Explore E*TRADE's Knowledge Library for much more on portfolios, asset allocation, ETFs, mutual funds, and other investing and trading topics.