There are many ways to build an investment portfolio. How you choose to do it will depend on your financial goals, needs, and risk tolerance.
In this video, we focus on three types of investment portfolios: income, balanced, and growth.
An income portfolio focuses on investments that make money from dividends or other types of distributions to stakeholders. The general goal of an income portfolio is to generate positive cash flow. It’s designed to cater to investors who have a low risk tolerance and need income, while also wanting to protect their money from loss of value.
An income portfolio is heavily weighted with fixed-income assets, such as bonds, treasury bills, cash, and cash equivalents; and some stocks, such as dividend-paying stocks.
A balanced portfolio assumes more risk than an income portfolio, and is for investors who are comfortable with taking low to medium investment risks in their bid to generate higher returns.
A balanced portfolio is typically a mix of stocks and bonds. The strategy is to take advantage of stock market growth with a cushion in bonds to mitigate downturns. Stocks tend to be the engine that drives portfolio growth, whereas bonds provide stability to effectively balance your investments. With a mix of stocks and bonds, you balance your risk level and your possible return on investments.
A growth portfolio is for investors aiming for higher returns and who have a medium to high risk tolerance and long-term investment horizons.
An investor with a growth portfolio takes on higher risk by investing more in equities and less in fixed-income assets.
Growth portfolios generally exhibit more volatility than income or balanced portfolios. On the one hand, this means they have the potential to generate higher returns than income or balanced portfolios. On the other hand, it means that when there is a market decline, they will suffer greater losses than income or balanced portfolios.
Ultimately, the type of investment portfolio that suits your needs will depend on your investing goals, comfort level with risk, and financial needs.
More resources are available from the BC Securities Commission.