When choosing funds for ISAs, pensions or other investment accounts, it is easy to get swayed by whatever investments are heavily tipped at the time or are leading the performance tables. The trouble with this approach is that it can lead to a portfolio that lacks balance and has a level of risk that isn’t right for you.
To build and manage a successful investment portfolio, we suggest following five key steps:
1. Be clear about your overall goals
Are you primarily looking for capital growth from your investments, an income or a combination?
2. How much risk can you tolerate?
A principle of investing is that there is a relationship between risk and reward – we expect higher risk investments such as equities to return more than low risk investments such as cash. However, taking on a high level of risk does not guarantee greater returns or it wouldn’t be risky! There are many ways to measure risk but a good starting point is volatility, which is the extent to which your investments fluctuate in value.
A key factor in deciding how much risk you can tolerate is the time period you expect to remain invested. Investors with a timescale of more than 10 years can tolerate more short-term volatility, for example by investing a higher proportion of their portfolio in equities, as they have time to recover from any short-term setbacks. In contrast, an investor who can only commit to remain invested for a short period of less than five years should focus on less volatile investments.
3. Choose your asset allocation
Asset allocation is the process of deciding how to spread your money across different types of investments such as bonds, equities, property, cash and absolute returns funds and then across different regions and investment styles.
As each type of investment will perform differently at various points in time, achieving a diversified asset allocation can help reduce overall volatility, as well as expose you to a wide range of opportunities. We have a video What is Asset Allocation? that explains how asset allocation works.
4. Select high quality funds
Once you have chosen an asset allocation strategy, it is important to populate it with high quality funds in each category. To help you build your own portfolio Premier Selection represents those funds that have been rated highly by our research term on the basis of rigorous research. Alternatively, you can choose one of our ready-made portfolios
5. Monitor your portfolio
Investing doesn’t finish at the point you buy your funds. It is vital to continue to monitor a portfolio once invested and to periodically reappraise it. This is because your asset allocation will drift over time and sometimes formerly strong funds can deteriorate or require reassessment, for example if a fund manager moves jobs.
At Bestinvest we have all the tools and information you need to plan your asset allocation, select highly rated funds and actively monitor your portfolios. If you are not currently a client, then why not try our Free Investment Report Service & Tool atbestinvest.co.uk/first to analyse how your own portfolio measures up?
Premier Selection features write-ups on a select number of funds across the sectors that our research analysts are highlighting to help you build a diversified investment portfolio. The highlighted funds cater to investors with different risk appetites and investment objectives, for example a requirement for income or growth. Download your free copy today.