A portfolio is the metaphorical folder where you keep all of your financial assets, or all the things that could provide value to you.
If you have any money invested, you have a portfolio. One of the simplest investments, a share in a company, is a kind of asset. When you own a share in a company, you own a portion of that company, and you’re entitled to a portion of its profits and assets. When the market values a company, your share gets assigned a proportional dollar value as well.
But most people don’t just own one stock, they own many; and more commonly, people own “mutual funds” or “exchange traded funds”, which, if we stick to the metaphor, are folders full of stocks themselves. They all have valuations, and the sum of those values tells you how much your portfolio is worth.
You can also add other kinds of assets to your portfolio. If you make a loan to the US government, you get a “bond”. The bond certificate would say how much you loaned, what the interest rate on the loan is, and when the government will finish paying you back. Like with stocks, you can own a ‘bond fund’, or a folder full of bonds. These bonds have values too (including the interest you’ll earn) that contribute to the value of your portfolio.
Stocks and bonds are publicly traded assets – that is, anyone can purchase an asset if they can afford it. But other individual assets could also fit into your portfolio: the mortgage for your home, the stock options granted to you by your company, private investments such as those made into a startup, etc.
It’s good to have a variety of assets in your portfolio. The more variety you have, the more diversified you are. Diversification is important because it can reduce your risk. Imagine if the only thing in your portfolio were shares in Ford. If something happened to Ford, like a shortage of supplies or a public controversy, your portfolio might seriously drop in value. But if you own shares in Ford, and you also own shares in GE, your GE shares might not be affected. That’s why even the simplest investment account should be diversified.
For example, at OpenInvest, we first diversify you by giving you both stocks and bonds. Then we diversify you among industries, to make sure that if for example something happens to the pharmaceutical industry, your whole investment isn’t at risk. You can also diversify by country and company size, and a variety of other factors. When you think about other kinds of assets you could add, a diversified investment account like one with OpenInvest is just the start of a diversified portfolio.