An investment portfolio is sort of like a sock drawer. Investments are the socks – a selection of assets that you use to reach your financial goals. The portfolio is the drawer – the container that holds all your investments. As you’re building your portfolio (filling up your drawer), you have a lot of choice about what kinds of socks to buy. The most common investments are stocks (also known as equities), bonds (also known as fixed income) and cash, but a portfolio can also include alternative assets, like real estate, fine art and cryptocurrencies.
What are stocks and bonds?
Even if you’ve heard of stocks and bonds, you may be wondering what they actually are.
If you buy a company’s stock, you own a (usually very small) piece of that company. If the company does well, generally the stock price will go up and you’ll make money. On the other hand, if the company does poorly, the stock price could go down and you could lose money too. When you buy a stock, you’re essentially betting that the underlying company will become increasingly profitable in the future.
Bonds are issued by governments and corporations when they want to raise money. They’re basically loan agreements between an investor (you) and an issuer (the company or government). By buying a bond, you give the issuer a loan. The issuer agrees to pay you periodic interest payments and will give you back the face value of the loan at some agreed-upon time in the future. Because the terms of the loans are set from the start, you won’t necessarily benefit if the company does well. On the other hand, you probably won’t lose money if the company does poorly (as long as it can continue paying its loan agreements).
What do I need to know about portfolio risk and diversification?
Nobody can predict how stocks, bonds or financial markets, in general, are going to perform, so it’s important to focus on the amount of risk you want to take. Stocks are generally riskier than bonds: they have the potential for higher returns, but also the potential for high losses. At the same time, there’s a lot of variance within each asset type. The risk profile of a particular stock or bond will depend on the specific characteristics of the underlying company or government – characteristics like its size, geographic location and exposure to different industry sectors. For example, an established Canadian financial services company probably has a different risk profile than a tech start-up in South Africa.
One way to reduce your portfolio’s risk is to diversify, which means buying a bunch of stocks and bonds from different regions and sectors. The theory behind diversification is that it can help minimize your losses. If you only own stock in one company, you run into trouble if that company stumbles. But if you own a bunch of different investments, there’s a good chance that gains from some will offset (or even exceed) losses in others. One way to easily diversify is to buy mutual funds or exchange-traded funds (ETFs), which are collections of hundreds (even thousands) of stock and bonds.
Can my portfolio include responsible investments?
Investments aren’t always just about making money – you might also want your investment dollars to make a difference in the world. If that’s the case, you should consider a Responsible Investing Portfolio. Responsible investing describes an investment approach that measures how companies or issuers manage environmental, social and governance (ESG) risks like carbon emissions, water management and data security. Learn more about how RBC InvestEase builds its Responsible Investing Portfolios in our whitepaper.
Can I build my investment portfolio myself?
You can build your own investment portfolio, but it can be tricky – especially if you don’t have a lot of experience. You’ll have to calculate how much risk you want to take, analyze which stocks, bonds, mutual funds or ETFs will do well, and buy the right combination of them to match your risk objectives. You’ll also have to monitor your portfolio, and buy or sell your investments as financial market conditions cause your asset mix to drift outside of the amount of risk you’re comfortable with.
Robo-advisors like RBC InvestEase can be great options for folks who want to invest but don’t know where to start. At RBC InvestEase, we’ll ask you a few questions to determine how much risk is appropriate for you as an investor. After we determine how much risk is right for you and you open and fund your account, we’ll invest your money in a portfolio of low-cost ETFs that has the right mix of equities, fixed income and cash to match your risk profile. Our team of Portfolio Advisors will continuously monitor your investments. If market conditions change, we’ll buy or sell ETFs to keep your portfolio on track. You can choose to invest in either our Standard Portfolio or our Responsible Investing Portfolio.
Filling up your sock drawer isn’t complicated, and building an investment portfolio doesn’t have to be either. RBC InvestEase is designed to help you achieve your investment goals in a way that’s easy and convenient for you. It’s that simple!