Without necessarily sacrificing returns, investors who hold portfolios can reduce risk.
Surprisingly, the volatility of a portfolio may be less than the volatilities of the individual assets that make up the portfolio.
When it comes to portfolios and risk, the whole is less than the sum of its parts!
A portfolio is a collection of investments assembled to meet one or more investment goals.
Different investors have different objectives for their portfolios.
The primary goal of a growth-oriented portfolio is long-term price appreciation.
An income-oriented portfolio is designed to produce regular dividends and interest payments.
Setting portfolio objectives involves definite tradeoffs, such as the tradeoff
- between risk and return or
- between potential price appreciation and income.
How you evaluate these tradeoffs will depend on your tax bracket, current income needs, and the ability to bear risk.
The key point is that your portfolio objectives must be established BEFORE you begin to invest.
The ultimate goal of an investor is an efficient portfolio, one that provides the highest return for a given level of risk.
Efficient portfolios are not necessarily easy to identify.
You usually must search out investment alternatives to get the best combinations of risk and return.