The term investment portfolio (证卷投资组合) conjures up visions of the truly rich--the Rockefellers, the WalMart Waltons, Bill Gates．But today, everyone--from the Philadelphia firefighter, his part-time receptionist wife and their three children, to the single Los Angeles lawyer, starting out on his own--needs a portfolio.
A portfolio is simply a collection of financial assets, it may include real estate, rare stamps and coins, precious metals and even artworks．But those are for people with expertise．What most of us need to know about arc stocks, bonds and cash (including such cash equivalents as money market funds).
How do you decide what part of your portfolio should go to each of the big three? Begin by urulerstanding that stocks pay higher returns but are more risky; bonds and cash pay lower returns but are less risky.
Reach by Ibbotson Associates, for example, shows that large company stocks, on average, have returned 11.2 percent annually since 1926．Over the same period, by comparison, bonds have returned an annual average of 5.3 percent and cash, 3.8 percent.
But short term risk is another matter．In 1974, a one-year ＄1000 investment in the stock market would have declined to ＄735.
With bonds, there are two kinds of risk: that the borrower won't pay you back and that the money you'll get won't be worth very much．The U.S．government stands behind treasury bonds, so the credit risk is almost nil．But the inflation risk remains．Say you buy a ＄1000 bond maturing in ten years．If inflation averages about seven percent over that time, then the＄1000 you receive at maturity can only buy ＄500 worth of today's goods.
With cash, the inflation risk is lower, since over a long period you can keep rolling over your CDs every year (or more often)．If inflation rises, interest rates rise to compensate.
As a result, the single most important rule in building a portfolio is this: If you don't need the money for a long time, then put it into stocks．If you need it soon, put it into bonds and cash.
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