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What is an investment portfolio?

Whether you’re starting out with £1,500 or have built up a pot worth £500,000, your investment portfolio is the key tool that’s going to help you achieve your long term financial goals.

What is an investment portfolio?

An investment portfolio is essentially an account made up of different financial products, known as assets. These can be held by a retail investor (you) or a wealth manager. The size of your portfolio will depend on the value of all the investments within your portfolio at any given time.

Imagine you’re looking to buy a car that’s going to clock up countless miles as you juggle the school run, taxi services to football practice and trips camping.

You’ll do your homework to make sure the vehicle you want is within budget, is high quality, has enough space and can keep up with your family demands. Once it’s yours, you’ll look after it, regularly filling it up with fuel, paying for regular MOTs and repairs when needed.  

The same philosophy should be applied to your investment portfolio. Once you know what you and your family are saving for, as well as when you want your money and what your financial situation looks like, you or a financial adviser can choose a portfolio that’s right for you.

Setting up regular investments will help you build up your money for your shorter- and longer-term goals, whilst health checks will ensure your investment portfolio is working as it should, and if it isn’t you might change a few things.  You’ll adopt a long-term investment plan, which will allow you to ignore any market wobbles along the way.

What are the different types of investments?

The investments you find in a portfolio tend to be grouped into three main asset classes: equities, fixed income and cash equivalents (although you can also invest in property and commodities).

‘Cash equivalents’ might sound unfamiliar, but they’re essentially just short-term investments that have a low-risk, low-return profile. They can include US government bonds and securities that can be converted into cash quickly.

Given the three asset classes rarely perform in line with each other, savvy investors can reduce the risk in their portfolios by spreading their money across equities, bonds, and cash equivalents. Each asset class has its own characteristics and serves its own purpose in a portfolio. 

How to allocate investments in a portfolio

The type of investments in your portfolio will depend on your investor profile. Understanding your tolerance to risk and what you’re trying to achieve, allows you to build a portfolio that reflects your needs and get you closer to your financial goals.

For example, if you want to offset the impact of inflation on your house deposit savings that you would like to use in a couple of years, you wouldn’t invest it in the riskiest equities. If you’re saving for retirement, however, you can afford to take on more risk in search of bigger returns.  

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As with all investing, your capital is at risk. T&Cs and ISA rules apply.

The best way to implement your investment strategy is through asset allocation – deciding how your money will be split across asset classes. Investors that try to balance the risk and return in their portfolio will adjust the proportion of the assets within it.

Investors looking to take on more risk will have a higher proportion of equities to bond and cash equivalents in their portfolio, whereas those looking to protect the value of their money will have a higher exposure to bonds.

What is a balanced portfolio?

No matter how confident you are, putting all your money into one investment or asset class is a risky game to play. Your money could surge five-fold, or it could collapse before your very eyes, never to recover.

Risk can affect companies, industries and entire asset classes alike. Risk is everywhere, but it’s what allows investors to seek returns. As the main asset classes rarely perform in sync, careful portfolio construction can help maximise your returns and downplay risk through diversification.

By spreading your money across different asset classes and regions, diversification aims to offset any losses with gains made elsewhere in your portfolio.

This doesn’t mean blindly putting your money into investments in the hope that something will do well, it means taking the time to understand and predict global market trends, and having the skill to value investments correctly.   

Building an investment portfolio for you

Building a diverse investment portfolio that reflects your investor profile is a crucial but difficult thing to get right.

Some investors love managing their investments themselves and get a thrill from pouring over the numbers and monitoring global markets. Others want to protect their money from inflation but are too busy, don’t have the knowledge, or are lacking the confidence they need to manage their savings without a helping hand.

For these reasons, many investors rely on fund managers to do it for them. By investing in a fund, you can get diverse exposure to a market. By investing with Moneyfarm, the hardest decision you’ll have to make is when and how much you would like to invest- we handle the rest for you.

We’ve developed algorithms that match you to a diversified Moneyfarm portfolio which is specifically built to reflect your investor profile. We then have a team of experts closely monitor and manage these portfolios for you, to ensure that you stay on track with your financial goals.  

Photo by Colton Sturgeon on Unsplash

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As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest.