In this post i'd like to go through a basic portfolio and breakdown the assets that come together to form it.
In this first image we can see a basic portfolio containing only stocks.
This is a fairly basic portfolio were we can see our fund, this makes up the cash money part of our portfolio, and it is from here that we purchase the shares and assets that make up our portfolio. As we can see from the diagram above, our fund is used to purchase companies that then go on to take up holding in our portfolio.
From here money returns made by these companies, be this from realized capital gains or dividends is then funneled back into the funds portion of our portfolio, ready to be used to purchase even more companies. The longer this goes on the more your companies will be contributing to your fund, and eventually your companies contributions may even outgrow your own.
Bigger portfolios may have more assets that make up the whole, these assets can include bonds and real estate. Having more types of assets in a portfolio can help to spread the risk of your investments and reduce the overall volatility of the portfolio.
A portfolio with different types of assets has access to more types of income streams. using the above example we can see interest from our bonds and income from our real estate being added to our fund. And of course this money can then be used to buy up even more assets.
Having access to more types of income allows a portfolio to continue to grow its contributions to the fund even when other assets are having a hard time, for example if stocks fell and as a result reduce the dividends you receive from that asset type, you'll continue to receive income through your real estate and bond assets.
As a bonus if one asset type falls, funds from your other assets can be used to buy up even more of the fallen asset type for a cheaper price allowing you to buy up more assets for your money.
Some people prefer to have well diversified portfolios for the reduced volatility but safer income, while others choose to go down a specific asset type for the increased gains but greater risk. Remember that each asset type can also be diversified, for example you can have shares in many types of companies spreading your risk over one asset type without having to dip into bonds or real estate.
When constructing your portfolio it is important to have an objective behind it, for example reaching a certain value by retirement, or producing a certain amount of income over time. From here you can decide what assets are best suited to accomplishing these goals and from there you can begin to build your portfolio around them.