What Is Portfolio Investment?

Pursuing a "main chance" business opportunity like this has the priority of achieving income or a substantial growth in net worth. Typically this style of investment is undertaken by those who are able to withstand the possibility of losing a large portion of their outlay, or at least able to replenish their capital fund from other sources.

Finally the investor in this case invariably has a specific expertise which they combine with the capital sum to make the business venture work.

This is a very different approach to portfolio investment where the investors’ purpose typically is to preserve capital and where diversification across a number of investments is undertaken in order to reduce exposure to any one investment calamity. The investor here is normally not fully engaged in personally managing the investments – they may already have a day job or be retired.

The portfolio investor still has to make decisions about how much growth they are prepared to chase and how much income they require from their portfolio. This will dictate which investments they will buy for their portfolio. But the important difference is that the portfolio is not vulnerable to the failure of any single investment. Controlling the exposure to any single investment is critical.

The investor in this case will not necessarily have any specific expertise in the businesses which investee companies are conducting. But they will have to have a general knowledge of portfolio construction if they are to prevent major wealth-destroying events devastating their net worth.

This is perhaps the most poorly understood aspect of portfolio investment. Investors that delegate all responsibility to professional advisers and don’t maintain an interest in the investment strategies being undertaken, add an additional tier of risk to their portfolio strategy – the risk of having their capital wiped out.

Any manager, institutional or boutique, can get it awfully wrong by not adhering to prudent principles and taking irresponsible bets. History is littered with these types of errors. Often deviant manager behaviour can be sheeted back to the fact it is not their money – leading to them having a very different attitude to risk and return than their client. Unlike the manager though, many clients do not have the luxury of rebuilding their shattered nestegg again. The manager moves on, the client can be left devastated.

Managers/advisors are necessary adjuncts to a portfolio strategy (they have knowledge), but investors – particularly those not in a position to replenish their capital base – cannot avoid the responsibility of care of their own nestegg. This means clients must keep themselves informed and aware of what managers are doing. Investors who want to just hand their funds over and forget about them thereafter are naïve, reckless and asking for a hiding.

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