{"concept":{"id":80,"slug":"risk-profile","term":"Risk profile","shortDefinition":"An investor's willingness and ability to take on the uncertainty of an investment -- a characteristic of the person, not the investment, distinct from a specific asset's risk.","longDefinition":"Risk profile is an investor's willingness and ability to take on the uncertainty of an investment -- it shouldn't be confused with risk, already covered in Level 1: risk measures the uncertainty of a specific investment's outcome, while risk profile measures how much of that uncertainty a particular investor can tolerate and take on. It has two components that can fail to align: tolerance, how psychologically comfortable the investor feels with their portfolio's swings, and capacity, whether they can afford, financially, to wait for a drop to recover without putting their goals at risk. An investor's risk profile is one of the factors that shapes their asset allocation."},"relations":{"requirement":[],"contrast":[{"concept":{"id":12,"slug":"risk","term":"Risk","shortDefinition":"Uncertainty about an investment's future outcome: the possibility that the actual result will differ from the expected one -- not merely the possibility of losing money.","longDefinition":"An investment's risk is not \"the probability of losing money\" in a strict sense, but the uncertainty about whether the actual result will match the expected one -- that result can be worse than expected, but also better. No investment is completely free of risk, not even holding cash, which carries the risk of losing purchasing power to inflation. Risk isn't uniform across asset types: it varies by issuer, term, and the nature of the instrument. It's directly tied to expected return -- see `return` -- and one way of measuring it, though not the only one, is volatility."}}],"related":[{"concept":{"id":85,"slug":"rebalancing","term":"Rebalancing","shortDefinition":"Bringing a portfolio's actual weights back toward its target allocation when they've drifted from it -- not deciding a new allocation, but readjusting the portfolio relative to the one already decided.","longDefinition":"Rebalancing is the action of bringing a portfolio's actual weights back toward its target asset allocation, already decided in Module 1, when those weights have drifted from it -- selling part of what has grown above its target weight, buying what has fallen below, or both. It isn't deciding a new asset allocation: the target allocation stays the same, and rebalancing is the action of readjusting the portfolio relative to it, not changing it. Without rebalancing, a portfolio can drift over time toward unwanted concentration risk, already covered in Module 3, and lose part of the benefit of the diversification decided in Module 2. It involves buying and selling, which carries a transaction cost and can generate a real tax cost that must be weighed against the benefit of correcting the drift."}},{"concept":{"id":79,"slug":"asset-allocation","term":"Asset allocation","shortDefinition":"The decision of what percentage of a portfolio goes to each asset class -- the central decision in building a portfolio, distinct from choosing which specific asset to buy within each class.","longDefinition":"Asset allocation is the decision of what percentage of a portfolio goes to each asset class -- stocks, bonds, ETFs, investment funds, commodities, currencies, all already covered in Level 1. It isn't choosing which specific stock or fund to buy within each class -- that's a later decision. According to numerous portfolio management studies, it's the decision that most influences a portfolio's long-term result, because different asset classes behave differently in response to the same events: combining them in the right proportions is the main lever for adjusting the risk and expected return of an entire portfolio, both already covered in Level 1. The right allocation depends on the investor's risk profile, their time horizon, and their liquidity needs."}}],"calculatedBy":[]},"curricularPosition":[{"id":69,"moduleId":25,"slug":"what-is-an-investors-risk-profile","title":"What is an investor's risk profile?","summary":"You understand what an investor's risk profile is and why it isn't the same as a specific investment's risk.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you understand what an investor's risk profile is and why it isn't the same as a specific investment's risk.\n\n## Content\n\nThe previous lesson left a question open: what determines how much should be allocated to riskier assets versus more conservative ones? The answer starts with the investor's risk profile -- a concept easy to confuse with risk, already covered in Level 1, but which measures something different.\n\nRisk measures the uncertainty of a specific investment's outcome -- it's a property of the investment. Risk profile measures how much of that uncertainty a particular investor can tolerate and take on -- it's a property of the person, not the investment. The same stock has the same risk regardless of who buys it; but two different investors can have very different risk profiles toward that same stock.\n\nRisk profile has two components worth distinguishing because they can fail to align. The first is risk tolerance: how psychologically comfortable the investor feels watching their portfolio's value swing -- if a notable drop leads them to sell out of panic, their real tolerance is lower than they thought. The second is risk capacity: whether the investor can afford, financially, to wait for a drop to recover without putting their goals at risk -- someone who will need the money soon has low risk capacity, regardless of how psychologically comfortable they feel with volatility.\n\nThese two components can point in different directions: an investor might feel psychologically comfortable with sharp drops -- high tolerance -- but have little real capacity to take them on because they need the money soon. In that case, capacity should weigh more than tolerance when deciding the asset allocation already covered in the previous lesson.\n\n## Example\n\nTwo investors with the same available capital can have very different risk profiles toward the same decision: one with high tolerance and high capacity -- who can afford, both psychologically and financially, a portfolio weighted more toward stocks -- and another with high tolerance but low capacity -- for example, because they'll need part of that money soon -- for whom a portfolio that exposed to stocks would be unsuitable despite feeling comfortable with volatility.\n\n## Common mistakes\n\n- Confusing an investment's risk with the investor's risk profile -- the first is a property of the investment, the second of the person.\n- Assuming \"wanting more return\" automatically equals having a high risk profile, without distinguishing between psychological tolerance and real financial capacity to absorb losses.\n\n## Summary\n\nRisk profile is an investor's willingness and ability to take on the uncertainty of an investment -- it shouldn't be confused with the investment's own risk. It has two components, tolerance and capacity, which can fail to align, and it shapes, together with time horizon, covered in the next lesson, the right asset allocation for each investor.\n\n## Self-check\n\nWhy isn't an investor's risk profile the same as a specific investment's risk?\n\nWhy can tolerance and risk capacity fail to align in the same investor?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you understand what an investor's risk profile is and why it isn't the same as a specific investment's risk.</p>\n<h2>Content</h2>\n<p>The previous lesson left a question open: what determines how much should be allocated to riskier assets versus more conservative ones? The answer starts with the investor's risk profile -- a concept easy to confuse with risk, already covered in Level 1, but which measures something different.</p>\n<p>Risk measures the uncertainty of a specific investment's outcome -- it's a property of the investment. Risk profile measures how much of that uncertainty a particular investor can tolerate and take on -- it's a property of the person, not the investment. The same stock has the same risk regardless of who buys it; but two different investors can have very different risk profiles toward that same stock.</p>\n<p>Risk profile has two components worth distinguishing because they can fail to align. The first is risk tolerance: how psychologically comfortable the investor feels watching their portfolio's value swing -- if a notable drop leads them to sell out of panic, their real tolerance is lower than they thought. The second is risk capacity: whether the investor can afford, financially, to wait for a drop to recover without putting their goals at risk -- someone who will need the money soon has low risk capacity, regardless of how psychologically comfortable they feel with volatility.</p>\n<p>These two components can point in different directions: an investor might feel psychologically comfortable with sharp drops -- high tolerance -- but have little real capacity to take them on because they need the money soon. In that case, capacity should weigh more than tolerance when deciding the asset allocation already covered in the previous lesson.</p>\n<h2>Example</h2>\n<p>Two investors with the same available capital can have very different risk profiles toward the same decision: one with high tolerance and high capacity -- who can afford, both psychologically and financially, a portfolio weighted more toward stocks -- and another with high tolerance but low capacity -- for example, because they'll need part of that money soon -- for whom a portfolio that exposed to stocks would be unsuitable despite feeling comfortable with volatility.</p>\n<h2>Common mistakes</h2>\n<ul><li>Confusing an investment's risk with the investor's risk profile -- the first is a property of the investment, the second of the person.</li><li>Assuming &quot;wanting more return&quot; automatically equals having a high risk profile, without distinguishing between psychological tolerance and real financial capacity to absorb losses.</li></ul>\n<h2>Summary</h2>\n<p>Risk profile is an investor's willingness and ability to take on the uncertainty of an investment -- it shouldn't be confused with the investment's own risk. It has two components, tolerance and capacity, which can fail to align, and it shapes, together with time horizon, covered in the next lesson, the right asset allocation for each investor.</p>\n<h2>Self-check</h2>\n<p>Why isn't an investor's risk profile the same as a specific investment's risk?</p>\n<p>Why can tolerance and risk capacity fail to align in the same investor?</p>","sortOrder":2,"readingMinutes":7,"difficulty":"Intermedio","url":"/en/academy/portfolio-management/asset-allocation/what-is-an-investors-risk-profile"},{"id":83,"moduleId":30,"slug":"how-do-you-build-an-investment-portfolio-step-by-step","title":"How do you build an investment portfolio, step by step?","summary":"You know how to combine the asset allocation, diversification, and risk management already covered in this level to build a real investment portfolio, step by step.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you know how to combine the asset allocation, diversification, and risk management already covered in this level to build a real investment portfolio, step by step.\n\n## Content\n\nThis level's five previous modules introduced, one by one, the criteria that make up a coherent portfolio: asset allocation based on risk profile and time horizon, diversification, managing concentration risk and correlation, rebalancing, and investor taxation. This lesson doesn't add any new criterion -- it brings together the ones already covered into a practical sequence.\n\nThe starting point is always the same: asset allocation, already covered in Module 1, decided from the investor's risk profile and time horizon. That allocation sets, in general terms, what proportion of the portfolio would correspond to each asset class -- stocks, bonds, ETFs, investment funds, commodities, or currencies, all already covered in Level 1 -- before choosing any specific instrument.\n\nOnce the allocation is set, the next step is diversifying within each asset class and across them, already covered in Module 2: combining assets that don't all behave the same way reduces the portfolio's risk without proportionally reducing expected return. Diversifying isn't simply adding up different instruments -- it's watching, as Module 3 showed, that no position concentrates a disproportionate risk, taking into account how the chosen positions relate to each other.\n\nSizing each position, also covered in Module 3, is what translates the allocation and diversification into concrete numbers: how much weight each position gets within the portfolio, consistent with its contribution to overall risk, not just with the investor's conviction in that specific idea.\n\nFinally, building a portfolio doesn't end at the moment of purchase. The tax cost of trades -- already covered in Module 5 -- and the future need to rebalance -- already covered in Module 4 -- are part of the criteria from the start, not an afterthought: a well-built portfolio anticipates that it will need to be reviewed over time, a topic the next lesson develops.\n\n## Example\n\nAn investor with a long time horizon and a risk profile that tolerates swings decides, based on their asset allocation, to put most of the portfolio into stocks and a smaller part into bonds. Within the stock portion, they diversify across several companies and sectors instead of concentrating the investment in just one; within the bond portion, they do the same across several issuers. Position weights have been set accounting for their contribution to concentration risk and how they relate to the rest of the positions.\n\n## Common mistakes\n\n- Choosing the specific instruments first and deciding the asset allocation afterward, instead of the other way around -- the allocation should precede the selection, not follow it.\n- Confusing \"diversifying\" with \"accumulating many different instruments\" without watching the real correlation between them.\n- Building the portfolio without considering from the start that it will have a tax cost and will need rebalancing -- treating both as a later surprise instead of a design criterion.\n\n## Summary\n\nBuilding a real portfolio means applying, in sequence, the criteria already covered in this level: asset allocation based on risk profile and time horizon, diversification within and across asset classes, sizing each position based on its contribution to overall risk, and anticipating the tax cost and the future need to rebalance.\n\n## Self-check\n\nWhy should asset allocation be decided before choosing the specific instruments that will make up the portfolio?\n\nWhy isn't diversifying the same as simply accumulating different instruments?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you know how to combine the asset allocation, diversification, and risk management already covered in this level to build a real investment portfolio, step by step.</p>\n<h2>Content</h2>\n<p>This level's five previous modules introduced, one by one, the criteria that make up a coherent portfolio: asset allocation based on risk profile and time horizon, diversification, managing concentration risk and correlation, rebalancing, and investor taxation. This lesson doesn't add any new criterion -- it brings together the ones already covered into a practical sequence.</p>\n<p>The starting point is always the same: asset allocation, already covered in Module 1, decided from the investor's risk profile and time horizon. That allocation sets, in general terms, what proportion of the portfolio would correspond to each asset class -- stocks, bonds, ETFs, investment funds, commodities, or currencies, all already covered in Level 1 -- before choosing any specific instrument.</p>\n<p>Once the allocation is set, the next step is diversifying within each asset class and across them, already covered in Module 2: combining assets that don't all behave the same way reduces the portfolio's risk without proportionally reducing expected return. Diversifying isn't simply adding up different instruments -- it's watching, as Module 3 showed, that no position concentrates a disproportionate risk, taking into account how the chosen positions relate to each other.</p>\n<p>Sizing each position, also covered in Module 3, is what translates the allocation and diversification into concrete numbers: how much weight each position gets within the portfolio, consistent with its contribution to overall risk, not just with the investor's conviction in that specific idea.</p>\n<p>Finally, building a portfolio doesn't end at the moment of purchase. The tax cost of trades -- already covered in Module 5 -- and the future need to rebalance -- already covered in Module 4 -- are part of the criteria from the start, not an afterthought: a well-built portfolio anticipates that it will need to be reviewed over time, a topic the next lesson develops.</p>\n<h2>Example</h2>\n<p>An investor with a long time horizon and a risk profile that tolerates swings decides, based on their asset allocation, to put most of the portfolio into stocks and a smaller part into bonds. Within the stock portion, they diversify across several companies and sectors instead of concentrating the investment in just one; within the bond portion, they do the same across several issuers. Position weights have been set accounting for their contribution to concentration risk and how they relate to the rest of the positions.</p>\n<h2>Common mistakes</h2>\n<ul><li>Choosing the specific instruments first and deciding the asset allocation afterward, instead of the other way around -- the allocation should precede the selection, not follow it.</li><li>Confusing &quot;diversifying&quot; with &quot;accumulating many different instruments&quot; without watching the real correlation between them.</li><li>Building the portfolio without considering from the start that it will have a tax cost and will need rebalancing -- treating both as a later surprise instead of a design criterion.</li></ul>\n<h2>Summary</h2>\n<p>Building a real portfolio means applying, in sequence, the criteria already covered in this level: asset allocation based on risk profile and time horizon, diversification within and across asset classes, sizing each position based on its contribution to overall risk, and anticipating the tax cost and the future need to rebalance.</p>\n<h2>Self-check</h2>\n<p>Why should asset allocation be decided before choosing the specific instruments that will make up the portfolio?</p>\n<p>Why isn't diversifying the same as simply accumulating different instruments?</p>","sortOrder":1,"readingMinutes":7,"difficulty":"Intermedio","url":"/en/academy/portfolio-management/building-a-portfolio/how-do-you-build-an-investment-portfolio-step-by-step"},{"id":84,"moduleId":30,"slug":"how-do-you-periodically-review-a-portfolio","title":"How do you periodically review a portfolio?","summary":"You understand how and when to periodically review a portfolio to keep it consistent with the investor's risk profile and time horizon, beyond rebalancing a drifted position.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you understand how and when to periodically review a portfolio to keep it consistent with the investor's risk profile and time horizon, beyond rebalancing a drifted position.\n\n## Content\n\nModule 4 already explained when and by what criteria to rebalance a portfolio that has drifted from its target allocation -- by calendar or by deviation threshold. This lesson doesn't repeat those criteria: it covers periodic review in a broader sense, of which rebalancing is only one possible action, not the only one.\n\nPeriodically reviewing a portfolio means checking whether it's still consistent with the investor's risk profile and time horizon -- not just whether each position's weight has drifted from the original allocation. Life circumstances change: a change in income, an approaching financial goal, or a real shift in the investor's risk tolerance can justify reviewing the asset allocation itself, not just readjusting it to the one that already existed. This is different from rebalancing: rebalancing returns the portfolio to an already-decided allocation; reviewing the risk profile and horizon can lead to deciding on a different allocation -- and only then, if warranted, rebalancing toward it.\n\nThe investment plan, already covered in Level 1, is what gives this process discipline: it defines in advance when and by what criteria the portfolio is reviewed, instead of reacting impulsively to a specific market move. Reviewing a portfolio with that discipline reduces the odds that an impulsive decision -- selling out of panic during a drop, or concentrating the portfolio in whatever has performed best recently -- replaces the judgment already built in the earlier modules.\n\nThe periodic review is also the moment to reconsider the accumulated tax cost, already covered in Module 5: a review that ignores the capital gain generated by a sale, or the possibility of applying loss offsetting, can generate more tax cost than necessary without really improving the portfolio.\n\n## Example\n\nAn investor reviews their portfolio once a year, according to their own investment plan. In one of those reviews, they notice their time horizon has shortened significantly -- the moment they'll need that money is approaching -- and decide, for that reason, to reduce the weight of stocks in their asset allocation. This isn't a rebalancing toward the previous allocation, but a review that changes the target allocation itself.\n\n## Common mistakes\n\n- Confusing \"reviewing the portfolio\" with \"rebalancing the portfolio\" -- reviewing can lead to changing the target allocation; rebalancing always returns to an already-decided allocation.\n- Reviewing the portfolio reactively, only when the market moves sharply, instead of with the discipline set by the investment plan.\n- Selling positions during a review without considering the tax cost of that sale or the possibility of applying loss offsetting.\n\n## Summary\n\nPeriodically reviewing a portfolio means checking whether it's still consistent with the investor's risk profile and time horizon -- not just whether it has drifted from its target allocation. Rebalancing, already covered in Module 4, is one possible action resulting from that review, not the whole review. The investment plan gives the process discipline, and the accumulated tax cost should be considered at every review.\n\n## Self-check\n\nWhy isn't reviewing a portfolio the same as rebalancing it?\n\nWhy is it worth reviewing a portfolio with the discipline set by an investment plan, instead of reacting to a specific market move?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you understand how and when to periodically review a portfolio to keep it consistent with the investor's risk profile and time horizon, beyond rebalancing a drifted position.</p>\n<h2>Content</h2>\n<p>Module 4 already explained when and by what criteria to rebalance a portfolio that has drifted from its target allocation -- by calendar or by deviation threshold. This lesson doesn't repeat those criteria: it covers periodic review in a broader sense, of which rebalancing is only one possible action, not the only one.</p>\n<p>Periodically reviewing a portfolio means checking whether it's still consistent with the investor's risk profile and time horizon -- not just whether each position's weight has drifted from the original allocation. Life circumstances change: a change in income, an approaching financial goal, or a real shift in the investor's risk tolerance can justify reviewing the asset allocation itself, not just readjusting it to the one that already existed. This is different from rebalancing: rebalancing returns the portfolio to an already-decided allocation; reviewing the risk profile and horizon can lead to deciding on a different allocation -- and only then, if warranted, rebalancing toward it.</p>\n<p>The investment plan, already covered in Level 1, is what gives this process discipline: it defines in advance when and by what criteria the portfolio is reviewed, instead of reacting impulsively to a specific market move. Reviewing a portfolio with that discipline reduces the odds that an impulsive decision -- selling out of panic during a drop, or concentrating the portfolio in whatever has performed best recently -- replaces the judgment already built in the earlier modules.</p>\n<p>The periodic review is also the moment to reconsider the accumulated tax cost, already covered in Module 5: a review that ignores the capital gain generated by a sale, or the possibility of applying loss offsetting, can generate more tax cost than necessary without really improving the portfolio.</p>\n<h2>Example</h2>\n<p>An investor reviews their portfolio once a year, according to their own investment plan. In one of those reviews, they notice their time horizon has shortened significantly -- the moment they'll need that money is approaching -- and decide, for that reason, to reduce the weight of stocks in their asset allocation. This isn't a rebalancing toward the previous allocation, but a review that changes the target allocation itself.</p>\n<h2>Common mistakes</h2>\n<ul><li>Confusing &quot;reviewing the portfolio&quot; with &quot;rebalancing the portfolio&quot; -- reviewing can lead to changing the target allocation; rebalancing always returns to an already-decided allocation.</li><li>Reviewing the portfolio reactively, only when the market moves sharply, instead of with the discipline set by the investment plan.</li><li>Selling positions during a review without considering the tax cost of that sale or the possibility of applying loss offsetting.</li></ul>\n<h2>Summary</h2>\n<p>Periodically reviewing a portfolio means checking whether it's still consistent with the investor's risk profile and time horizon -- not just whether it has drifted from its target allocation. Rebalancing, already covered in Module 4, is one possible action resulting from that review, not the whole review. The investment plan gives the process discipline, and the accumulated tax cost should be considered at every review.</p>\n<h2>Self-check</h2>\n<p>Why isn't reviewing a portfolio the same as rebalancing it?</p>\n<p>Why is it worth reviewing a portfolio with the discipline set by an investment plan, instead of reacting to a specific market move?</p>","sortOrder":2,"readingMinutes":7,"difficulty":"Intermedio","url":"/en/academy/portfolio-management/building-a-portfolio/how-do-you-periodically-review-a-portfolio"}],"graphSummary":{"root":{"type":"concept","id":"80","depthFromRoot":0,"entity":{"type":"concept","slug":"perfil-de-riesgo","term":"Perfil de riesgo","excerpt":"Disposición y capacidad de un inversor para asumir la incertidumbre de una inversión -- una característica de la persona, no de la inversión, distinta del riesgo de un activo concreto."}},"depth":1,"returnedNodes":1,"truncated":false,"hasCycle":false,"nodes":[{"type":"concept","id":"80","depthFromRoot":0,"entity":{"type":"concept","slug":"perfil-de-riesgo","term":"Perfil de riesgo","excerpt":"Disposición y capacidad de un inversor para asumir la incertidumbre de una inversión -- una característica de la persona, no de la inversión, distinta del riesgo de un activo concreto."}}],"edges":[]},"relatedNews":[],"relatedEntities":[]}