An investment portfolio is a collection of total assets and financial investments such as stocks, mutual funds (ETFs), bonds, and more.
A portfolio is a way an investor manages his/her risk. A larger distribution in investment instruments such as blue-chip stocks, government bonds, and broad-market index funds will lower the portfolio’s risk. Alternatively, a larger distribution in high growth stocks, high yield bonds, small-cap stocks, or emerging market funds will increase the portfolio’s risk.
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A good portfolio should reduce the investor’s unsystematic risk, also known as diversifiable risk. For example, investing in many technology stocks will reduce the risk of one particular company creating significant losses; however, the portfolio remains vulnerable to the technology market fluctuations.
This type of risk is also diversifiable. Sector ETFs are designed to remove almost all unsystematic risk from a particular sector. By investing in several sector ETFs, you can reduce your portfolio’s company-specific risk and sector risk. This is the kind of strategy employed by our sector rotation strategy.
An investor’s goal should be to design a portfolio that maximizes potential gains and minimizes the risk to an overall level with which the investor is comfortable undertaking.