<p>A portfolio is a collection of financial assets held by an investor. It can include stocks, bonds, real estate, cash, and other investments.</p>

<h2>How It Works</h2>
<p>A portfolio is created by selecting and combining various assets to achieve specific financial goals. Here's a simple breakdown:</p>
<ul>
  <li><strong>Selection:</strong> Investors choose assets based on their expected returns, risks, and how they complement each other.</li>
  <li><strong>Allocation:</strong> They decide how much to invest in each asset, known as <a href="/NewSite/encyclopedia/asset-allocation/" class="ency-link">asset allocation</a>. This is often based on factors like investment horizon, risk tolerance, and financial objectives.</li>
  <li><strong>Diversification:</strong> By spreading investments across different asset classes, sectors, and geographies, investors aim to reduce risk. This is known as <a href="/NewSite/encyclopedia/diversification/" class="ency-link">diversification</a>.</li>
</ul>

<h2>Why It Matters</h2>
<p>Portfolios matter because they help investors manage risk and return. For instance, consider two investors, Alex and Jamie:</p>
<ul>
  <li>Alex has a portfolio with 80% stocks and 20% bonds. In a market downturn, Alex's portfolio might drop significantly due to the high stock exposure.</li>
  <li>Jamie, on the other hand, has a more diversified portfolio with 60% stocks and 40% bonds. In the same market downturn, Jamie's portfolio would likely drop less, thanks to the bond allocation acting as a buffer.</li>
</ul>
<p>This example illustrates how portfolio composition can impact risk and return, making portfolio management a crucial aspect of investing.</p>