IF THERE was a list of the most stressful events to occur in your life, there’s a good chance that the death of a loved one, moving house or getting married would be at the top of it. But among this list of stress-inducing incidents, the placement of savings could prove to be at the top of most investors’ lists!
The more sensible among us like to know exactly where our money is going. You want to be able to sleep easy and guarantee that you are making the most of your money, and that it is invested to meet your needs. You wouldn’t buy a car with only three wheels, you wouldn’t use a boomerang that didn’t bounce back and you certainly wouldn’t build a house with no doors! So why should your investment be any different? You still want the basic guarantee of security, access and a good return. Perhaps it’s time to apply this basic knowledge to our investments and investigate what is entailed in building the perfectly tailored portfolio.
Building a portfolio need be no different from building a house. It is a structure made of several separate blocks, each of which needs to be catered to meet your individual needs. And just like some builders will overcharge and under-work, there are investors out there who are duped into investing into a portfolio that does not suit their requirements. You need to be extra careful that you are being recommended exactly what you have asked for.
There are three key considerations you should think about when you start to investigate a suitable investment strategy. Firstly, you need to have a clear objective. What do you wish to get out of your investment? Will it be income, growth or a combination of both? Secondly, you need to judge your time horizon. Are you aiming to save for a particular event, or to plan for retirement? As a rule of thumb, it makes sense if you are investing in stock market related funds to have a time horizon of five years or more. Lastly, you should consider diversification within your investment to reduce the risk. Look to invest across different asset classes such as equities and fixed interest, but also be aware that this could mean diversifying across different geographic regions and currencies.
Now that you have a goal in sight, it is important not to put all your eggs into one basket and to invest in a portfolio that spreads the investment across several different areas. Here are three examples of portfolios that show which components suit different types of investments:
The income portfolio
Constructing a portfolio, which aims to provide a generous income flow over the medium to long-term, requires careful consideration. For those retired (or approaching retirement), the oversight most easily made is to underestimate your longevity and look towards a portfolio that will provide a substantial return in the short-term, yet peters out after a few years. A suggested income portfolio should include a mixture of equity funds and fixed interest funds.
As the patterns of returns for these two funds do not tend to coincide, they are ideal to use in an efficient income portfolio. While equities can sometimes be a little unpredictable in the short-term, they mix well with fixed interest investments, which offer a stable stream of income but not the same level of capital growth potential. A well-balanced income portfolio offers the opportunity for capital growth to build a dream and a growing stream of dividend income to maintain your vision.
Balanced growth portfolio
An investor with a balanced growth portfolio will have an investment that can provide long-term growth, ideally without the volatility associated with some higher risk equity investments. It is possible within a balanced growth portfolio to include income funds as they can make up a large part of the total return for an investor. While some believe the word “income” should not feature in a growth portfolio, it is important to remember that it is not necessary to take the income accumulated and that it can be rolled up within the fund to enhance total returns. Growth portfolios tend to have a bias towards equities as they offer better growth prospects longer term. It is possible to vary your portfolio by using different equity funds run in different styles. This helps to offer a more balanced approach to both UK and overseas markets.
Global opportunities portfolio
For the elaborate lifestyle just bursting to get out in all of us, you want to set yourself up in a portfolio that can offer maximum capital growth, but without throwing caution to the wind. While this portfolio is wholly invested in equity-based funds, it can offer diversification by investing in funds covering different markets such as the US, Europe and the UK. A smaller companies fund would be a good inclusion in this portfolio as it provides access to the best opportunities by some of the world’s smaller companies. A natural resources fund is also a good bet at the moment with emerging markets like China offering increasing demand for commodities.
Like building any good structure, you have to make sure you care and maintain for your investment. Once you have selected a portfolio, make sure you are receiving enough information to monitor its performance. Be aware of fluctuations in the market and how your portfolio fares through these. Make sure you are getting the best returns by comparing your investment to similar funds and don’t be afraid to make changes if you are not happy with the performance. Remember you are your own investment architect!