Getting invested – how to build your portfolio

The savings and investments you choose to invest in make up your ‘portfolio’. Here’s how to tailor your investment choices to your investment goals for a bespoke portfolio.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Why it is important to set investment goals
  • How to choose a mix of assets to hold in your portfolio
  • What level of involvement you should have in picking investments for your portfolio.

Every investor needs to ask themselves the same basic questions before getting started. If you’re gearing up to make the move into investing, you’ll need to know what your goals are, how long you expect to invest, how much money you’re able to invest and how comfortable you are taking risks. And given there are risks involved, you also need to look at how much you could realistically afford to lose.

Clarify your investment goals

You might be investing to have enough money for retirement, which could be decades away. But you could also have shorter-term goals too, like starting a family or buying a larger home. You'll invest differently for a goal that's five years away than for one that's 20 years into the future, as a longer time should, provided you are comfortable doing so, let you take on more risk.

The cost of living will rise over the years, so if you're investing for the long term, you need to take into account a realistic rate of inflation for every year you invest. There's no point in getting to retirement age to discover your spending power has been reduced, so make sure you factor in inflation when working out your investment returns strategy.

Find out more about the impact of inflation and deflation on investments.

If you're investing for a shorter-term goal, you may want to take a cautious approach, because losses can be harder to recover. Thinking about how much financial risk you’re comfortable exposing yourself to is vital.

Find out more about your attitude to risk.

Asset allocation – how do you choose what goes where?

Asset allocation is all about deciding how much of your money you choose to put into different types of investments. The main types of assets people rely on for investing are shares, bonds, cash and commercial property. Many investors prefer to invest in these via funds too, as their cash is then spread across each. By investing across a broad range of assets, it helps you to diversify your risk, as you are not relying on the success of one single investment.

How you allocate across these assets will be largely down to not only what you want to achieve, but also how long your investment time horizon is. If you're comfortable with more risk and you want a greater chance of stronger growth, you might allocate more money into shares. But if you are looking for more consistent returns, then government and corporate bonds could be the way to go.

Always remember the golden rule of investing though, which is the greater the potential returns, the bigger the risk. But by combining both investment types, you'll be spreading your risk even further. Many investors keep a proportion of their portfolio in cash. This provides the necessary 'liquidity' to minimise risk as much as possible and can be used to buy assets if a good opportunity arises.

Find out more about diversifying your portfolio.

Hands-on or hands-off?

How involved you want to be in choosing your investments depends on how much experience you have and the kinds of decisions you're comfortable making. Some people like to choose the investments that make up their portfolio themselves. Others prefer to invest through funds. These offer an easy way to build a diversified portfolio and, depending on how they're managed, they can be cost-effective.

You might also prefer to explore your investment options and strategies with the help of a professional financial adviser. You could opt for a multi-asset fund, which is run by a portfolio manager who invests across a variety of investment assets, including shares, bonds and property as well as cash. But whichever route you take always make sure you understand what you‘re investing in and the associated risks.

Making a plan and sticking to it

One of the key things to remember is to stick to your plan. This goes back to working out what you need and want from your investments. You'll want to keep an eye on things over time, adjusting your asset allocation to make sure the portfolio stays on track to meet your goals and within your risk parameters. It's also important to remember that movement in the markets is normal and it can be harmful to switch your investments too much, as well as costly.

Find out more about ‘buy and hold’ investing?

Any investment carries risk and there's always the chance that you could get back less than the sum you invest. But leaving your money to grow in the long term means there's more chance of recovering any losses along the way.

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