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  • How to build a portfolio

    We take a closer look at how to invest with a core-satellite approach.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Building your portfolio and hand-picking your investments from scratch can be a tricky art to master.

    To help with this, we’ve looked at a flexible investment strategy.

    We think it's important to think about your goals when investing. Creating your own portfolio is a hands-on approach so you’ll need enough time to review your portfolio regularly.

    This article gives you information on how to build an investment portfolio, but isn’t personal advice. If you're not sure an investment is right for you, seek financial advice.

    Think about a core-satellite strategy

    It's a strategy that does what it says on the tin.

    A core-satellite approach involves holding a main core of investments surrounded by smaller satellites.

    The idea is to help you achieve greater returns with a relatively lower level of risk, thanks to diversification. Holding a well thought out portfolio that includes lots of different investment types reduces the impact of any one area performing poorly on the value of your portfolio overall.

    We think it's a great strategy for lots of investors, experienced or novice.

    How it works

    The core should be a mix of collective investments, like funds or investment trusts, that act as the bedrock to your portfolio. They might not be the most exciting of performers, but they’re there to help steady the ship.

    The satellites come in for more diversification, and to help you put your own personal spin on your portfolio. They could be funds or investment trusts that don't necessarily match your risk appetite on their own, but manage to match your overall portfolio risk level once added alongside your core investments.

    You can also use your satellites to gain exposure to different types of investments and stock markets around the world. Holding a mix of satellites to support your core should mean you’ve always got some investments doing well.

    Putting it into practice

    There’s no one-size-fits-all approach. Investing is personal, so you’ll need to choose investments that align with your long-term investment goals and attitude to risk.

    Before you invest, make sure you understand the specific risks of a fund. Read the key investor information for the details, including charges.

    This diagram is for illustration purposes only.

    Backed by diversification

    Even with a good amount of research, holding a wide range of investments is always the best way to minimise volatility. No investment strategy is bullet-proof though, so the value of your portfolio could still go down. Whatever strategy you choose, diversification across several investments is key.

    Different areas, investing styles, and asset classes normally perform differently at different times. If you choose funds that all invest in the same way, you'll probably only be right some of the time.

    The visual below displays how the global stock market value is split between a number of different countries.

    Source: FTSE Russell All-World, 30/07/21.

    We think investors should maintain a balanced, diversified portfolio – it's best to have a mix of funds which invest, and therefore perform, differently to each other. Over time a diversified portfolio could perform more strongly and should lead to better, more consistent long-term returns.

    Investing like this can mean putting your money in funds that are performing well, and others that aren't doing as well right now. But investing is a marathon. When the tide turns some of your portfolio might well be in the right place to benefit.

    What if I’m investing for income?

    Whether you’re investing for growth or income, the core-satellite approach is still a great strategy. Depending on how much income you need, you might have to make some changes to focus more of your portfolio on investments that give you an income.

    Remember though, all income yields are variable, not guaranteed and are not a reliable indicator of future income.

    You could have a number of core funds that aim to pay out a steady income. These are normally funds that invest mostly into shares or bonds in developed countries, like the UK, that have been traditionally more reliable for income generation.

    With your core funds probably invested in traditional income areas, you could look further afield for your satellites. Investing in funds with more investments in less traditional income areas, like emerging markets, could be one way to help boost your income and add diversification. Investing in less developed areas like emerging markets carries more risk though.

    Choose your account

    To start investing, you’ll need to open an account.

    Whether you're building a pension pot or saving for something specific, try our filter to find the one that is right for you.

    As your portfolio develops, you might decide to open more than one.

    Compare accounts

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Learn more about investing

    Category: LEARN ABOUT INVESTING

    Should I save or invest?

    Category: Investing essentials

    Diversification: what you need to know

    Category: Investing essentials

    Risk: what you need to know

    Category: Investing essentials

    Investing behaviours: what you need to know