What Is a Portfolio?

You’ve got big ideas for your future, but it’s going to take some money to get there. If you’re looking to grow your money, you’ve probably heard that investing is a great way to do it. When you look to get started with investing, you’ll frequently hear the term “financial portfolio.”

We’ll help you understand what a portfolio is, how to make one, and why it’s helpful to work with an advisor when designing a portfolio.

What is a financial portfolio?

Simply put, a financial portfolio, also called an investment portfolio, is a collection of financial assets. It may have stocks, bonds, cash and cash equivalents, alternative investments, life insurance, property or other assets.

In an investment portfolio these different types of investments come from different asset classes. You’ll want to have a mix of different asset classes in your investment portfolio. That way, when some perform poorly, others are likely to perform better. This is known as diversification—holding different types of securities that will perform differently than one another depending on market conditions.

Components of a financial portfolio

Here are some assets that are commonly held in a portfolio:

Stocks

Stocks represent ownership interest in a company. You can make money in stocks when the company pays a portion of its profit in dividends or when the value of the company increases and you sell your shares for more than you paid for them. (Just imagine if you’d bought stock in an internet company 20 years ago.)



Stocks are generally a way to grow the amount of money you invest. But their values can fluctuate pretty widely, making them a high-risk, high-reward investment—especially in the short term.

Many people put some of their investment portfolio into stocks because of their potential to yield growth. The percentage of your portfolio made up of stocks will usually depend on your risk tolerance and how close you are to needing the money that you’re investing, often referred to as your “time horizon.”

Bonds

Bonds are investments in debt. Bond investors loan money to bond issuers, such as corporations or governments. The terms of the bond establish when the bond matures (when it will be exchanged for cash) and the interest that it will accrue and pay. Though you can purchase bonds directly from an issuer, bonds can also be bought and sold on exchanges much the same way that stocks are traded.

Bonds are typically considered less risky types of investments compared to stocks. In other words, their values do not tend to fluctuate as much as stock prices. As a result, bonds usually do not provide the same return potential as stocks.

Cash

Cash and cash equivalents are more or less what they sound like. They are a portion of a portfolio consisting of cash (which can be both domestic and foreign currency) as well as equivalents such as certificates of deposit, money market mutual funds and U.S. Treasuries. Cash and cash equivalents typically return little profit in a portfolio, but they are an important component.

Funds (like mutual funds)

Funds are in some ways portfolios themselves because they are collections of assets. Funds collect money from individual investors and then invest based on the fund’s mandate. A mutual fund, for example, may invest in certain types of stocks, bonds or other investments—perhaps in a certain region of the world. Mutual fund prices are set after the market closes for the day.

An exchange-traded fund (ETF) is similar to a mutual fund in that it allows investors to invest in an entire basket of securities. One major difference from a mutual fund is that an ETF trades throughout the day as prices fluctuate (similar to stocks). Funds are a popular way to get different kinds of investments into your portfolio without having to buy them each one by one.

Risk tolerance and types of financial portfolios

Ultimately, what you put in a portfolio should depend on your tolerance for risk. If you invest heavily in stocks, you may make more in the long run than does someone who invests only in bonds. But in the short term, you could also lose more. When building your portfolio, you’ll want to think through how much risk you’re willing to take.

Here are some different ways you may approach your portfolio, depending on your needs:

Aggressive

This allocation is usually skewed toward stocks, which are riskier but offer greater opportunity for growth. This approach can be a good fit for someone who doesn’t plan to use the money invested for a long time, so there may be time to recover from losses. Aggressive portfolios typically have around 70 percent or more invested in stocks, with the other 30 percent invested in more stable investments. An aggressive portfolio may also include speculative investments, such as brand-new companies, initial public offerings or alternative investments.

Conservative

A conservative allocation, also known as a defensive style, is geared toward preserving capital. It is usually heavily invested in diversified fixed income and cash but contains some exposure to equities to allow for upside potential. The percentage allocated to riskier investments will be much lower than an aggressive portfolio—often less than 50 percent. This usually provides less opportunity for growth. It may be a good fit for people close to retirement or already retired. It might also be a good fit for other people who need the cash soon, such as someone planning to buy real estate or fund college tuition.

Socially responsible

Like most investors, ESG investors—or socially responsible investors—want to maximize their investment returns while limiting risk. But these investors consider a lot more factors related. Before investing, ESG investors look at how a company approaches the environment, social equity and corporate governance and try to invest only when certain standards are met¹.

Income

An income portfolio holds investments with income specific mandates, such as dividend stocks, real estate investment trusts and bonds. The portfolio’s goal is to hedge against interest rate volatility and combat the gradual erosion of purchasing power. This type of portfolio is particularly attractive to investors who have a low risk tolerance or who are currently receiving income from it, like a retiree.

Which portfolio type makes sense for you will change throughout the course of your life. If you’re young and just starting to build your wealth, you may want a more aggressive investment style since you may not need to access your money for a while. But as you near retirement and when you’re in retirement, you may want to make sure you don’t lose the nest egg you’ve built, so you may look at more conservative investments. Your financial advisor can help you decide which investment strategy makes sense for you at the time and help you adjust as life changes.

What is an example of a financial portfolio?

One example of a balanced investment portfolio might be a 60/40 portfolio, which might be a good fit for an investor looking to take on moderate risk. It holds 60 percent of its assets in equities and 40 percent in fixed income. The equities selected may include stocks in U.S.-based companies that are of varying sizes: small, medium and large, along with international companies. Another way to get exposure to these asset classes may be by investing in mutual funds or ETFs. Fixed income investments might also include a few mutual funds or ETFs and some corporate bonds and US Treasuries with varying maturities. The amount of higher-risk investments slightly outweighs the mix of lower-risk investments, which leaves room for some growth but can limit the volatility in the portfolio.

Your portfolio is part of a larger financial plan

Investments are great at helping you achieve certain financial goals, but thinking only about investments alone could leave you and your family vulnerable to risk. You’ll also want to look at how you’ll protect the money you’ve made if life throws you unexpected curves—like a dip in the stock market or an unplanned family event.

Research shows that when you include financial options, like disability insurance or life insurance, that work alongside your investments to protect you from risks while you work toward your goals, you’ll have better financial outcomes than by simply relying on investments.

Finding the right mix of financial options to suit your current and future needs is an important step in this process. A Northwestern Mutual financial advisor can get to know what’s important to you and help you make decisions that will help you achieve everything you want—from which financial options make sense for you to what type of portfolio you should build.

And the work doesn’t stop there. You’ll continue to have your advisor’s help through all phases of your life, helping you adjust your plan as your needs change.

1. There is no formal definition of an ESG investing style and ESG factors may be subjective and defined differently by fund managers or sponsors. There is no Securities and Exchange Commission “rating” or “score” of E, S, and G pillars that can be applied uniformly across a broad range of companies, and while many different private ratings based on different ESG factors exist, they often differ significantly from each other. Some ESG fund managers may consider data from third party providers. This data could include “scoring” and “rating” data compiled to help managers compare companies. Some data used to compile third-party ESG scores, and ratings may be subjective, while other data may be objective in principle, but are not verifiable or reliable. Third-party scores also may consider or weight ESG criteria differently and companies can receive widely different scores from different third-party providers. ESG funds may perform differently than other funds without the ESG parameters. Certain industries may be excluded from some ESG Fund portfolios. However, some ESG Funds may still invest in “best in class” companies within commonly excluded industries. For example, an ESG Fund could invest in a certain company within an industry where companies commonly have a large carbon footprint because that company demonstrated a commitment to improving its policies and practices on environmental issues. Moreover, companies which may score poorly on one ESG factor (such as carbon footprint) could be selected because they score well on another ESG factor (strong governance) or because the fund manager has plans to engage with the companies to improve their performance on ESG issues. As with any investment, you could lose money and investing in an ESG Fund should fit within your overall investment goals. ESG funds often take more work for fund managers to construct and manage and, consequently, can cost more than a passive fund that tracks a broad- based market index. A portfolio manager’s ESG practices may significantly influence performance.

All investments carry some level of risk, including the potential loss of principal invested. Diversification and strategic asset allocation do not assure profit or protect against loss. Stocks/equities have greater potential for gains as well as greater potential for loss than bonds/fixed income investments.

Exchange-traded funds (ETFs) have risks and trade similar to stocks. Shares of ETFs are bought and sold in the market at a market price, as a result, they may trade at a premium or discount to the fund's actual net asset value. Investors selling ETF shares in the market may lose money, including the original amount invested.

You should carefully consider risks with fixed income securities such as bonds. These include interest rate, duration, credit, default, liquidity and inflation. Interest rates and bond prices tend to move in opposite directions; for example, when interest rates fall, bond prices typically rise. This also holds true for bond mutual funds. High-yield (junk) bonds and bond funds that invest in high-yield bonds present greater credit risk than investment-grade bonds.