Whether you’re starting out with £1,500 or have built up a pot worth £500,000, your investment portfolio is the vehicle that’s going to help you achieve your goals.
Although it’s got a fancy name, an investment portfolio is essentially an account made up of different types of financial products, known as assets, these can be held by a retail investor (you) or 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 the 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 motor you want is within budget, good 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 paying for any repairs when they’re needed.
The same philosophy should be applied to your investment portfolio. Once you know what your family are saving for, when you want your money, and your financial situation, you or a financial adviser can pick 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 confusing, 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.
As the three main 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. For example, equities have a higher-risk profile and can suit an investor looking for high returns.
How to allocate investments in a portfolio
The 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 will get you one step closer to your financial goals, not further away.
For example, if you want to offset the impact of inflation on your house deposit savings that you intend to use in a couple of years, you’re not going to invest it in the riskiest equities. If you’re saving for retirement, however, you can afford to take on more risk in the search for bigger returns.
The best way to implement your investment strategy is through asset allocation – deciding how your money will be split across asset classes. Investors trying to balance the risk and return in their portfolio will adjust the proportion of the assets within it.
An investor looking to take on more risk will have a higher proportion of equities to bond and cash equivalents in their portfolio, whilst 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 is everywhere; it’s what allows investors to seek a return. Without it, investors would have to watch inflation eat into the purchasing power of their savings over time.
Risk can affect companies, industries and entire asset classes alike. As the main asset classes rarely perform in sync, careful portfolio construction can help maximise your returns 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.
That 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 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.
Other families want to protect their money from inflation but are too busy, don’t have the knowledge or are lacking the confidence to manage their family’s savings without a helping hand.
It’s why many investors get fund managers to do it for them. By investing in a fund, you can get diverse exposure to a market – although these are usually accompanied by a high fee.
There are now low-cost opportunities for investors previously excluded from the traditional wealth management industries. The most difficult decision Moneyfarm investors have to make, for example, is when and how much to invest; we do the rest for you.
We’ve developed algorithms that match you to a diversified Moneyfarm portfolio 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.