Portfolio - it's the composition that counts
What is a portfolio? The definition
In finance, the term describes portfolio the entirety of all investments and assets of an individual or organization. The origin of the term is in Latin: Portar means “carry” and folium “Leaf” — in short, “collect leaves.” A portfolio therefore comprises various forms of investment, such as Stocks, bonds, real estate or precious metalsto achieve the best possible performance and manage risks.
Important: Portfolio management not only focuses on increasing value, but also minimizing risk through well-thought-out diversification.
Development of an investment portfolio to minimize risks
A well-structured portfolio combines various asset classes and industries. A balanced mix could look as follows:
- Stocks and bonds for short to medium-term income
- Real estate and commodities for stable values
- Precious metals and currencies for protection in times of crisis
By distributing investments across different asset classes and regions, the overall risk can be reduced, as these investments generally develop independently of each other. In this way, potential losses of one investment can be partially offset by the profits of another investment.
The Markowitz portfolio theory
In the 1950s, the US economist developed Harry Markowitz The one named after him Portfolio theory, which received the Nobel Prize in Economics for its innovative character. This theory describes the concept of an optimal portfolio structure: It emphasizes the simultaneous consideration of Return and risk and focuses on the diversification as a central tool for reducing risks. Key elements of Markowitz theory:
- Diversifying risk through diversification: Combining high-risk and low-risk investments.
- Correlation of investments: The lower the price dependency of the asset classes, the more stable the portfolio.
- Consideration of overall risk: The focus is on the performance of the portfolio, not just on the performance of individual investments.
Importance and implementation of diversification
diversifying means putting together a portfolio in such a way that losses in the value of individual investments can be cushioned by others. The motto here is: “Don't put all your eggs in one basket. ” Investors who manage their investments themselves should include various types of investments in their portfolio. In this way, the risk in the portfolio can be kept manageable and the assets are stabilized in the long term.
Anyone who does not have time to intensively deal with portfolio development can rely on portfolio managers Get support. They analyse markets, follow trends and manage investments in accordance with their clients' investment objectives and risk appetite. However, it is definitely worthwhile to aim for a diversified portfolio.
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