Independent Wealth Management

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How to Build an Investment Portfolio

When make an investment (whether it be a lump sum, regular savings or a pension contribution), you have some important decisions to make and fund selection will be high on your decision list. If your investment is small, you may decide to use a single fund. However, for most, it is important to build a suitable portfolio of funds because:

  1. You don’t want to put all your eggs in one basket.
  2. You don’t know which type of fund is likely to perform the best.
  3. You want to spread your risk.
  4. You recognise the need for diversification between different asset types and fund management styles.
  5. You may even be aware of Harry Markowitz, the father of Modern Portfolio Theory, who published a paper called ‘Portfolio Selection’ in 1952. Over subsequent decades, his theories were tested and proved valid, which lead to his Nobel Prize for economics in 1990.

However, the first thing you need to do is to establish your tolerance for investment risk.

This can be achieved by deciding whether you are very cautious, cautious, balanced, risk aware or speculative. You may find some information on line to help you to determine this. I like to use an 18 point risk assessment questionnaire combined with a general discussion.

You will next need to decide on the selection of asset classes to invest in.

You have a wide selection to choose from which includes Equities, Fixed Interest, Corporate Bonds, Gilts and Property. These funds may invest in the UK, Europe, North America, Japan, Far East, and of course many other parts of the world. Other variations include Emerging Markets, Technology, Natural Resources, Absolute return, Ethical, etc.

Next comes your Asset Allocation model.

Based on your attitude towards investment risk, you will need to build an appropriate asset allocation model. This defines the proportions of your investment that is placed into a selection of the above asset classes. Here’s one I prepared earlier for a particular client. Please don’t copy this as it may not be right for you.

And now for the bit I really enjoy. This is where you get to pick the funds.

So let’s start with the UK equity part of the portfolio and in the interests of diversification, it would be good to split this between growth, income and smaller company funds. So, actually we’ll start with UK smaller companies.

You will need to locate a list of all the available funds within your pension or investment plan, select the UK smaller companies funds and then compare them. It’s no good just seeing which one grew the most last year, so you need to look into the history and look for some consistency. It’s also useful to find out how volatile the fund is and how it compares with the sector average. Also, how long has the fund manager been looking after the fund and are there any other issues that would affect your decision to invest?

Fortunately, much of this work has been done by organisations such as Financial Express, Rayner Spencer Mills, Crown, Citywire and Standard & Poor’s. Quite simply, if these organisations all highly rate a fund, then you can assume it’s a good fund. Of course one issue here is that you will generally have to pay for this research. So now you just need to repeat this exercise for all of the other asset classes. In my experience this could be up to 20 funds in total.

Phew! So that’s it. All done.

Well apart from monitoring your portfolio. You see, from time to time, what started as a good fund could deteriorate. Furthermore, another fund may emerge as being a stronger contender for your portfolio. So, it’s important to repeat some of the above steps periodically. Also, your attitude to risk could change, especially as you approach the maturity date. So you may need to adjust the asset allocation. Periodically, your portfolio will need to be rebalanced. For an explanation on this, please go to my earlier article entitled Portfolio Rebalancing.

To conclude.

Well, I hope you managed to stay with me to this point and enjoyed an insight into my world. Clearly, most people don’t want to trouble themselves with the above and don’t have access to the recourses that I do. I have the training, qualification and experience to do all of this for you. This is one of the reasons why we’re called Professional Wealthcare.

If you would like help with your investment decisions, please contact us.

Please remember, that investment returns may go down as well as up.

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When my wife and I were looking for advice on retirement financial planning a few years ago, Barry was recommended to us by another IFA, who no longer provided that type of advice. Over the last few years, Barry has provided us with very good financial planning advice, tailored to our particular needs and attitudes to financial risk. He contacts us regularly to update us with the latest information and to see if our needs have changed but leaves the final decisions to us, i.e. he does not try to push a particular financial product or company. We have been very pleased with his advice to date and look forward to continuing our association with him.

Mr K.T.

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