Before You Can Start an Investment Portfolio You Need to Know What It Is

If you have ever asked yourself, What is a portfolio?, you are not alone. It’s an important term that you should know before you begin investing. Andy Sotiriou / Photodisc / Getty Images

When you begin investing for the first time, one of the most common terms you are going to hear connected to your financial life is the word portfolio. People might refer to their portfolio, an energy portfolio, a bond portfolio, a retirement portfolio, or even something esoteric like a portfolio of intellectual assets. What does it all mean? What is a portfolio?

In simple terms, the word portfolio is used to describe a collection of things. It can be art, stocks, bonds, real estate properties, precious metals such as gold or silver, intellectual property such as copyrights, trademarks, and patents, and even lesser known assets such as mineral rights.

Some investors will use the word when discussing everything they own (e.g. My portfolio is up ten percent this year.), while other investors will use the word to talk about a specific collection of assets (e.g. My commercial real estate portfolio has been doing well; occupancy is up, as are lease rates. We’re thinking about building another three-story office building.).

A bank will often refer to its loan portfolio, since the loans it has made using customer deposits represent its primary source of earnings, and are thus, investments.

In the media, the most popular use of phrase is unquestionably retirement portfolio, which refers to the assets and investments you own designed to help you generate passive income once you have left the workforce, often from dividends, interest, and rents .

As an investor, and the CEO of your own life, your job is to build an investment portfolio that meets your needs, fits your risk profile, and consists of assets you understand, all administered at a low cost. If you are like the typical American, your portfolio will begin the moment you get hired at your first real job and you are enrolled in the 401(k) plan. Or, perhaps as likely, you decide you want to open a Roth IRA or Traditional IRA on your own to buy investments and collect income from them tax-free or tax-sheltered. Some people begin by opening an account with a mutual fund company, such as Vanguard or Fidelity.

How Your Portfolio Makes Money

Almost all portfolios make money in one of five ways:

• Dividends — This represents your share of the profits because you own a productive asset or business
• Interest — This represents interest paid to you by a borrower because you lent money
• Rents — This represents consideration paid to you by someone who wanted to use your property for a specific amount of time, often a rental house, office building, industrial warehouse, or storage unit
• Licensing rights — If you own intellectual property, the ability to license the rights can be a large source of income. The Walt Disney Company generates billions of dollars by licensing its portfolio of characters to manufacturers who then sell everything from backpacks to furniture.
• Capital gains — The profit generated by purchasing an asset at one price and selling it at a higher price.

How to Start Building Your Own Investment Portfolio