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.
How to invest your money wisely
In this episode of Money Plan, we uncover the key beliefs of investment wisdom to make sure we give ourselves the best chance of success in terms to getting a good return on our money and being a successful investor.
Welcome to Word on the Street's Money Plan podcast from Barclays UK, where our experts share their knowledge and insights to help you manage your money and become a better and more confident investor.
Clare Francis: Hello and welcome to another episode of Money Plan our regular Personal Finance podcast. I’m Clare Francis, Savings and Investments Director at Barclays. Wisdom, the quality of having experience, knowledge and good judgment, so when it comes to investment decisions how can we ensure we're making wise choices, and giving ourselves the best chance of success in terms of getting a good return on our money. Well to help me find out I’m joined by Miles Sherry, an Investment Consultant, and Rob Smith who is Head of Behavioural Finance here at Barclays.
Before we start I just need to remind you that when it comes to investing stock markets can fall as well as rise, so there's always a chance you could lose some money. Also we don't offer personal advice so if you're unsure about next steps please seek independent financial advice, and nothing we cover today is a recommendation. Miles, Rob, it's great to have you both here again today, and Rob can we speak to you first, investing wisely, how can people set themselves up for success?
Rob Smith: Hi Clare, it's a really good question because there is a bit of a misnomer in general that people think that investing wisely must be about becoming an expert investor and therefore spending lots of times pouring over companies, understanding the economy et cetera.
Whilst obviously this is a requirement for professional investors and if you're going to try and select the best companies to invest in then obviously you have to do some of that, but what I'd say for people who are I’d term as normal investors who don't have or want to spend all that time, the path to wise decision making is really about a little bit of knowledge, in order to give you the confidence around investing, but you don't need a lot because you can piggyback on the knowledge of others and of the professionals.
So it takes a little bit of effort and let's be honest what in life doesn't, but it's worth it and you can definitely see a long long-term reward from putting in that little bit of effort.
So for me the key is to understand a little bit about investing, and I’m talking about in general, what the risks of investing are and look like, especially over a time horizon that fits with how long you're going to invest for, so not just what's the risk of things going up and down today, tomorrow, the next month, but potentially in the many years to come. But also to understand how you can manage risk by spreading investments, and we'll talk a little bit about this later on.
But also around understanding your time horizon and how long you're investing for, but also as well as just understanding the basics of our investing it's important to know a lot about yourself as well.
CF: That's interesting, so from your experience is it just attitudes and emotion understanding yourself that are the key things or are there other things as well that are important to think about?
RS: So have having self-awareness is a really important trait of being a good investor, that whether you're a novice first time investor or whether you're an investment professional, and what I mean by this is two things, not just as you said the emotional attitudinal side and responses, but also, first of all knowing your financial situation and goals.
Because that's really important to then understanding how you can go and invest and as we would always say, investing isn't right for everyone, you've got to understand that you've got the financial buffer in place before you start thinking about investing, and you can meet some of those short-term goals before you get to the right time horizon for investing.
But also then reflecting on your own attitudes and emotional responses to what investing might bring you. And what I mean by that is you've got to think about how you feel about taking risk in the long term, and I mean about the length of time you're looking to invest for whether it's 5, 10, 15, 20 years, whatever it is.
Try and think about at the end of the day, when you look at the end of that period and what you get back, how do you feel about a little bit of a chance that you might not have as much as you have put in over that time, but then the opportunity that you might have a lot more, and you can fine-tune the risk of your investments to reflect how you feel about risk.
We're all naturally risk-averse, obviously if you have the choice between a safe bet and a gamble that are worth the same amount you're always going to choose the safe bet, but in reality investing involves uncertainty of course, but the reason why you're putting up with that uncertainty is because it gives you an opportunity of higher returns.
So you need to understand how you feel about that, and how much you can withstand in the longer term, but then also what's really important is to understand how you're likely to react to the investments as they move along through time, so in the much more shorter-term.
So what I mean by that is if you're going to be looking at your portfolio every day, which I definitely wouldn't suggest, but if you do or if you're going to be tracking the financial news and financial markets, how is a move in short-term performance going to make you feel.
So even though you think maybe in the long term I’m happy to take on a little bit, or a bit more risk, a decent amount of risk because the potential on the upside is very high, the reality is that on a short-term basis if we think about some of the shocks we've been through recently.
You would see quite a significant downward move potentially through some of those periods. and how would that make you feel even in the short term, and some people wouldn't be able to live with that even though over the long term we think it might resolve itself.
So it's really important to understand your attitudes towards risk both in the long term and the short term and that the last thing I want to say is that one of the key things about making good investment decisions is to make them in periods of calm, and what I mean by that is financial calm, so not because you need to but because you have the space to make that decision.
So not because you're being forced to sell for any reason because it's an emergency and therefore you need to take money out, or you don't want to be forced to make a decision because of emotional reasons like one of the most common ones we talk about actually is about being hungry, and actually being hungry is one of the worst times making any decision because it depletes our cognitive abilities.
So it's really important those decisions you are going to make, make them in a time where you've got space you've got time, you're not emotionally stressed, you're not financially stressed, because then you'll end up making the best decisions.
Miles Sherry: Some really, really, good points there Rob, but the one you particularly hit the nail on the head on is actually that last point, because you're right you really don't want to be a false seller, so for me it's really important to try and have a bit of a plan.
So really before you even actually look at your investment options the first step I'd probably suggest to do is to actually sit down do a bit of budgeting, we all know it can be a bit painful but the short-term work done there should hopefully help you over the longer term.
So perhaps take a look at your income as well as your all your outgoings and expenditure is then probably as well worth adding an extra amount to that expenditure total for unexpected bills, so a bit of a buffer for stuff like car repairs maybe, or if your boiler unfortunately breaks down in the middle of winter and I just think that doing that groundwork should give you a decent understanding of what extra cash you have which you can actually commit to investing without hopefully needing to touch over the long term.
You really, really, don't want to be in a position where you over invest and then realize you need to sell some of those investments down which could theoretically be during a point where markets have had a little bit of a wobble meaning you're a bit of a false seller near the bottom of the market.
CF: That's a really good point and it's something we try and talk about a lot is that having cash is really important, so almost save for a rainy day invest for your longer term future. Also that budgeting point in knowing how much you've got to put away, you've got spare and you can afford to invest is really key too, and it's important to be realistic about it.
I remember in my previous life as a national newspaper journalist, I was I was doing a mortgage article, speaking to a mortgage broker about budgeting for a house, and he made the point about being realistic in terms of what you need to live off every month, and to factor in those extras like going out and being able to treat yourself now and again.
Because if you cut back too much then you're just not likely to be able to keep it up in the long term, and I guess it's the same with investing because of the point you've just made Miles, you don't want to be over committing and then finding yourself having to access the money earlier than planned.
MS: Exactly, I think it is in reality one of the main reasons probably why people unfortunately don't actually achieve their financial goals.
But if we maybe go back to today's topic, so how to invest wisely, one of the key points to remember when it comes to investing is that time really is your friend, so you should be taking that longer term view, and by that at Barclays we would suggest at least five years in terms of your investment horizon, and there are a couple of reasons for this including riding out market dips and also the power of compounding as well.
CF: Yes, compounding, Einstein famously described it as the eighth wonder of the world, Rob can you explain why is it so powerful?
RS: Yes of course. So first of all, just to explain for those people that maybe, haven't, don't really understand what compounding is, it's a word that gets used a lot. So compounded is the idea that every time money earns a return, that can be interest from a bank account, if you are lucky enough to get any, or dividends from being invested, that return can then earn return in the next period.
So once you've earned that interest, you can reinvest it, re-put it in an account and it then gets return on itself, and then that return on the original return again gets returned another in the next period and it just it just compounds, hence why it's called compounding.
But just to really bring it to life and how it ramps up, is that if we take an example, so a cup of coffee costs around £2 in the shop, let's say a takeaway around £6 and an average night out with drinks can cost up to £70, now obviously those numbers vary wildly, but, just as an example if we remove one coffee a day, one takeaway a week and one night out a month at those levels. you can save up to £1800 a year.
Now that sounds like a good amount considering you've not potentially given up lots, but when you think about then investing that, and compounding that up at a return of let's just say 5% because it makes it easy to do some of the maths, you end up with £125,000 in 30 years-time. Now that's obviously quite a long period but think about £125,000 from making what are quite small changes over the short term.
And that's for me one of the reasons why compounding is so fascinating for a behavioural perspective is that we're typically really bad at seeing just how big an impact it makes, because we tend to underplay the effects of compounding, because what happens is it gets larger and larger the effects as time goes on.
So 1-5 years and 5-10 years, the effect of those two periods isn't the same, in the 5-10 years having much greater effect than the 1-5, and you can extend that out and out and that's why you end up with such large figures when you think about maybe investing for your retirement, which could well be in 30 years-time.
CF: Hence I guess why the earlier you can start, and the longer you can keep your money in, the more you benefit from that impact of compounding. And then another biggie that we always talk about when it comes to investing is diversification, Miles why is diversification so important and how can you achieve it?
MS: Yes, it's another big buzzword in the industry, just like compounding, but I'd probably point to two main reasons. Firstly, and maybe actually most importantly, diversification should just help the overall investment journey become a little bit more comfortable, because the idea is essentially to hold a mix of investments that are likely to behave sufficiently differently to one another.
So let's think about this in the real world, so when the economy is growing you tend to find that the riskier asset classes like developed market stocks for example, they tend to perform quite well on average in that environment, but when the economy is slowing or maybe we get a shock such as the pandemic last March those riskier asset classes can actually fall in value really quite sharply.
Now if you hold other asset classes in your portfolio some of which are less risky, then you should be able to add a bit of robustness to your portfolio which will hopefully help you generate smoother overall performance.
So just as an example, asset classes like developed government bonds, whilst they do still have a degree of risk, they are typically deemed to be some of the safest investments you can make above cash, and in periods of market stress what you tend to find is they typically rise in value, as investors sell out of those riskier shares and buy asset classes that will hopefully offer a degree of return which are typically very low risk.
So while stocks may be falling in value other investments like government bonds may rise in value, and it just makes the journey that little bit more comfortable.
CF: So I guess it's not just a case of investing in the flavour of the month, or whatever's fashionable doing well at the time, but you also want to make sure that you've got exposure, you are invested in things that maybe look a bit less appealing at the moment, or a bit more boring, but could come into flavour at another time?
MS: Exactly, and we've spoken about this before haven't we, just because technology is doing amazingly well as a sector doesn't mean you want to hold all of your portfolio in technology stocks, things can work well for you in that example until they don't.
But expanding on that the second reason around diversification is it also actually widens your opportunity set, so as another example emerging market stocks, they're typically one of the riskier asset classes that you can invest in, but they do tend to offer you higher returns over the long term when compared to developed stocks, and the idea here is that emerging companies will typically over the long term have a higher growth rate than their developed counterparts.
But other asset classes include the likes of commodities, they've done very well so far this year as demand has really rebounded as economies have started to unlock. You've also got corporate bonds, so they can typically be categorized into two suitable areas investment grade they tend to be the better quality corporate bonds and then the riskier higher yield bonds as well.
Now the point here is you're probably sitting there thinking how on earth do I know how much I should actually allocate to each of these asset classes, it probably sounds a little bit tricky and the reality is we'd we completely agree with you, it's not easy. And so that's why at Barclays we have a dedicated team whose sole job is just to basically work out the best mix of all of these investments, to produce the best risk adjusted return possible in line with each person's individual investment objectives.
So the takeaway here is that if you don't want to dedicate time to this, or maybe you simply feel more comfortable leaving it to a team of experts, then there are a few options at your disposal which may be suitable.
So starting off with, we've got our Ready-made investments range that's available across five risk profiles on our Smart Investor website.
We've then got Plan & Invest, that's our digital Wealth Management service which is available for anyone with at least £5,000 or more to invest, and that's tailored to you basically based on a questionnaire that you complete telling us a bit about yourself, your goals and your overall risk tolerance.
And finally for those of at least £500,000 to invest you can also have access to one of our discretionary portfolios via our Wealth Management business.
CF: Thanks for that Miles, now we're talking about how to invest wisely, but if we flip it on its head are there any common mistakes that people make when investing that could perhaps be described as unwise?
RS: 100% is the answer, but most of the mistakes we see in investing is because of a lack of understanding of the risks of certain types of investment, and because our decision making can easily be influenced by factors that aren't necessarily important and things like compelling stories around why to invest, and this is where the self-awareness really comes in.
And just to bring that to life, so investing in a few single stocks and shares of companies can be very risky, so even companies that seem safe if you like, because maybe they're bigger they're more well-known, they still can suffer from significant price falls.
No stock or share is spared, and even investment managers who, the way they position themselves is on their conviction to hold certain companies, would tend to have a lot more than a couple of investments in their portfolio, as a minimum they would probably have at least 15 or so.
It's easy to think that because you think a company has really good prospects then it should make a really good investment, and that feels like a safe bet. But the problem is that our perception of good investment can be easily influenced by things like the products that they sell and that we use and we like them, and therefore we think that must be a good company going forward, even though it may not necessarily be a good investment.
And a company that you think may be more profitable in the future is only going to be a good investment if their price doesn't already take that fact into account.
And what I mean by that and Miles talked about technology, and technology is a good example because it's an area that's debated a lot.
So the high valuation of certain companies, and lots of companies have gone through times where the value of their stock has looked particularly high, and also certain industries like technology we just talked about means that you have to be very, very, very confident that they'll deliver above what is already expected by that price to be a good long-term investment.
Because that price may have already baked in that there's going to be significant future growth in that market, so you've really got to be confident that you can you understand and can see growth beyond what is the market expectation.
But really the main thing is that good long-term investment is not terribly exciting, so if you want that excitement of being invested in specific companies and what that brings.
What I would say is that you can put a significant proportion of the money you can afford to invest into something a bit more boring, maybe a fund that's managed to a risk level that you're happy with, and then you can use a little bit of what you have to then go and invest in something that you find interesting or find exciting, because what we wouldn't say is no one should be able to have any fun while investing, and therefore no one gets invested.
It's much better that you make most of your money work in a way that is sensible then you give yourself a bit of money to play with, and then it doesn't matter too much if you make some mistakes and get some of those decisions wrong.
CF: And it's interesting quite a lot of people do that, don't they have their core investment which is there for their longer term goals and that hopefully that financial security in the future, and then they have their fun pot which is the bit as you said that they can play around a bit with and it doesn't matter so much if they back the wrong horse so to speak?
CF: Miles just before we finish, any other tips from you in terms of investing in a wise way and minimizing the chance I guess of making a mistake or losing money?
MS: Yes, actually. So a really important point to consider is how you're investing your money essentially in the most tax efficient way, and you really want to make sure you can fully understand the options available to you.
So at the time we're recording this in October 2021, UK resident taxpayers are eligible to invest in an Individual Savings Account, it's more commonly referred to as an ISA. So if you don't already have one of these then you probably should invest within this particular wrapper before investing in say a normal taxable portfolio, and the reason behind that is that you can contribute £20,000 each tax year.
But going back to the compounding point Rob mentioned earlier, that can clearly mean that the value in investments can grow more efficiently than if they're being taxed because any return, be that capital gain or income produced by stocks and bonds is completely tax-free at the moment, so make sure you're using your ISA allowance each year is very important.
CF: A great point to end on Miles thank you, and also worth making the point that you don't have to invest the full £20,000 within an ISA.
MS: You can put £1 in theoretically.
CF: Yes, so again don't over stretch yourself to the point we were talking about earlier.
Thank you both so much for your time today, I’m sure everybody listening will have some useful information to take away with them now which will hopefully be helpful with their investment decisions and thank you all for listening.
We've got lots more information on this topic and other topics to help with your investment decisions on our website so you can visit www.uk/smart-investor.
Now enjoy the rest of your day and I hope you'll join us again to listen to next month's podcast, thank you.
DISCLAIMER: all investments can fall as well as rise in value and their past performance is not a reliable indicator of future performance. This podcast is not a personal investment recommendation.
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