How to build an investment portfolio

Business Insights

When it comes to starting your investment journey, it can seem overwhelming thinking about where to begin and how to build your portfolio. There’s a huge range of options out there, but a few basic principles can help narrow down the options and guide your decision making. Rob Morgan, Chief Investment Analyst at Charles Stanley shares his top considerations on building a diversified investment portfolio.

    1. Own a wide mix of assets

The stock market can experience the biggest ups and downs, but historically over the long term has also provided the best returns. So, whatever your financial aspirations, having the bulk of a portfolio invested in the stock market makes sense if you have plenty of time to invest. Be aware though that the value of investments can fall as well as rise meaning that investors may get back less than they initially invested – especially over short periods.

Other assets can help provide some balance by performing differently and evening out some of the more dramatic moves. If you are more cautious, or have less time to invest, then you’ll probably want to more ‘balancing’ assets, notably bonds which represent loans to governments or companies. These pay interest to the holder and tend to provide a lower return in the longer term compared with stock market investments but can still do better than cash.

    2. Broaden your horizons

Although different stock markets are often ‘correlated’ with one another (they tend to move up and down together) they can produce different returns at different times with leadership varying from month to month and year to year.

Having a mix of geographical areas represented in your portfolio will help you capture as many opportunities as possible. No country has all the best companies so make sure you have some money invested in all the major areas help to cover all bases.

    3. There is no such thing as a perfect portfolio

As with many things in life, it is possible to let perfect be the enemy of good. The challenge of trying to do the right thing can be intimidating, making it easy to give up and miss out on the long-term benefits of investing. It doesn’t need to be complicated though. As long as you have some good building blocks to begin with, such as simple, broad and low-cost products, then it is likely you’ll be moving in the right direction.

Keeping it simple when it comes to investing could mean a ‘tracker fund’ that aims to replicate the performance of a market through owning all or most of the companies in it. A global tracker, for instance, will cover a large proportion of all the companies in the world. Meanwhile, ‘multi asset’ funds can offer a handy way to access a professionally-managed, diverse portfolio covering lots of different areas – equities, bonds and other areas – in a single investment.

    4. Core and satellite

One route for either novice or experienced investors is a ‘core-satellite’ strategy. This involves a central core of more mainstream investments to act as bedrock surrounded by satellites, perhaps more specialist in nature, that personalise your portfolio.

Lots of investors look for investment funds that have the best recent performance, but this can be a mistake. You might join the upward momentum for a time, but outsized performance often reverses, leaving you with an underperforming asset. Broad, passive strategies avoid this problem as they just follow the market as a whole. Alternatively, a mix of funds with different investment ‘styles’ can help.

Always remember to keep to the rough mix of assets you are comfortable with. More shares exposure is an option if you are happy with taking more risk and investing for the long term, more stabilising assets such as bonds can help iron out those market peaks and troughs into a smoother journey. You could also consider investing in more specialist assets to diversify further – things such as property (for instance through investment trusts in this area), private equity, commodities such as gold and targeted absolute return funds.

    5. Don’t forget tax

Even if it doesn’t seem relevant in the shorter term, tax relating to investments – income tax and capital gains tax – can become an issue. To allay any concerns, either present or future, house your investments in as Individual Savings Account (ISA) where these taxes don’t apply.

Alternatively, if you are investing for retirement, and don’t need access to your money before then, you can use a pension. When you contribute to your pension, the government adds money. This is called tax relief and is one of the main advantages of using a pension to save for retirement. You should prioritise your workplace pension, if applicable, as your employer will make contributions on top of your own. Pensions are one of the most efficient ways to invest for retirement and can have a considerable impact on the size of your investment pot and income you are paid.

Rob Morgan, Chief Investment Analyst at Charles Stanley