Written by Ian Robinson – Independent Financial Planner
No two investors have the same life goals, so why should they hold the same investments? How do you begin creating an investment portfolio that reflects what you want to achieve in life?
Where you invest your money should depend on your goals. The chances are, nobody else has exactly the same goals as you. If that is the case, then why should you have the exact same investment portfolio as somebody else?
While an increasing number of Roboadvisers and online platforms make it easier than ever to invest, such simplified investing is only possible because you are getting the same portfolio as thousands of other investors. That is, unless you choose the funds to invest in. With a wide array available, how do you know which ones to choose to match your goals, attitude to risk and capacity for loss?
If you have never used the services of a financial planner to put together your portfolio, confidently picking the right investments yourself is a daunting task. Not only do you need to pick the right assets classes, but you need to also pick the right investment managers and the right tax wrappers.
The first question to ask is “Why do you invest?” To buy a home for you and your family? To achieve financial independence at an early age and live off your savings? To be financially secure when you retire? Whichever it is there are several factors to consider:
How much are you saving? Do you need to seek higher returns to offset lower savings rates? How long are you able to commit these funds?
If you are able to save a large percentage of your income, you may be happier with more conservative investments. This leads us on to how do they work?
Risk level and capacity for loss
How do you feel about risk? Are you willing to tolerate short-term market swings of up to 30% if it means a chance at a more competitive long-term return? Do you distrust shares? How much can you afford for a portfolio to fall before it affects your standard of living?
What used to be known as ethical investments, but now ESG (Environmental, Social and Governance).
When you invest your money, where do you want it to go? Is it important to you to avoid socially or environmentally harmful industries, oil, gas, arms, tobacco? Do you want to proactively invest in technologies that could make the world a better place?
All of these considerations can be built into a portfolio tailored for you.
Hands-on, or hands-off?
How actively do you want to manage your investments? Do you enjoy reading financial books and magazines and adjusting your portfolio regularly? Or would you prefer a set-it-and-forget it approach in which you might only review and rebalance your holdings once a year?
All of these questions illustrate what I mean by “different goals.” Even if you and a friend are both 35 and hoping to be financially independent by age 55, you will have different investment needs based upon other variables like savings rate, risk tolerance, and how much you anticipate withdrawing in the future.
For example, a very simple portfolio for a risk-tolerant investor with a long horizon (20 or more years) might be 80% shares and 20% bonds. Simple index funds (exchange-traded or mutual funds) provide a low-cost way to get started in just two investments. The mix of the four basic asset classes (shares, bonds, property, and cash) will depend upon your risk tolerance, capacity for loss and investment timeframe. Asset classes perform in different ways and a blend of these contributes to a diverse portfolio.
From there, it is time to review, tailor, and optimise your portfolio.
One pro and con to the index funds I mention above is that they invest you in everything. This provides total diversification and may be fine for the set-it-and-forget-it set, but more involved (or more aggressive) investors either won’t want to be invested in everything or will want to be invested more heavily in certain areas that have a potential for growth or are most aligned with their values.
Clearly, this article just scratches the surface of portfolio design. What other factors need to be considered?
Investment funds differ considerably in cost. Some index funds charges are as low as 0.1 – 0.15%, whilst some portfolio funds can exceed 2%. There is normally a good reason for this and that is the level of investment management. A fund that tracks an index requires no input from a manager and so can be low cost, whilst one that relies on individual stock selection by an individual or team will have a higher cost. The benefit of the latter is that there is an opportunity to outperform the market, whilst a tracker should never outperform, only follow a general course.
Active or passive?
This really follows on from portfolio costs. Actively managed funds cost more, but the input of a portfolio manager can add value. Why Tesco and not Sainsburys? Why BP not Shell? There may be very good reasons for investing in one and not the other. An active manager will look at these companies and make choices over stock selection. Passive funds follow an index and will hold stocks regardless of future prospects, but merely because they form part of an index, such as the FTSE 100.
Domestic or overseas?
A common mistake among new investors is to overlook investment opportunities abroad. For example, investing a FTSE 100 index fund is not the worst move a new investor could make. But that index only holds UK-based companies. This means that growth opportunities elsewhere in the world are overlooked and also means you are over exposed to one economy.
Higher risk investments
Whilst lower risk investors might feel that investment in emerging markets is not for them, it is wrong to exclude them from a balanced portfolio. The important factor is the level of exposure. If there is, say, 5% in emerging markets, then this would be counter-balanced by perhaps 10% in cash, or low risk investments. Excluding an asset from a portfolio due to its risk level merely places more emphasis on a smaller range of assets, making it more dependent upon these.
The investments you hold should reflect your individual goals:
- When you need the money
- How much you can save before then
- Your tolerance for risk
- Your social values
- How hands-on you want to be when managing your money
Should you feel that you can handle all of this and the associated tax planning, then self-management of a portfolio is for you. If, however, you want so spend your time in a different way, then leave it in the hands of a professional. As Chartered, independent financial advisers, we will select the investment approach that best fits each client.
If you would like further information about investments, or should you require additional guidance on a separate financial planning matter, then please do get in touch. You can contact me directly on 01603 706864 or by emailing email@example.com. Alternatively, you can contact Lucas Fettes directly at firstname.lastname@example.org.
The contents of this article do not constitute financial advice. The impact of taxation (and any tax relief) depends on individual circumstances. This has been prepared based on our current understanding of UK Law, Taxation and HMRC practice, all of which could be subject to change in future. The value of investments can fall as well as rise and it may not always be possible to receive back the sum initially invested. Past performance is not necessarily a guide to future investment returns.