How to build and maintain your portfolio

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All information is correct as at 30 September 2022 unless otherwise stated.

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Whether you’re a new or seasoned investor, you need to think about your strategy.

Your investment strategy should match your objectives and your risk appetite. It should aim to achieve the best return for your chosen level of risk.

We take a closer look at asset allocation and set out the four steps to building your own personalised portfolio from scratch. However, this isn’t only for new investors. Even if you’ve built your own portfolio already, it’s worth a refresher to make sure you’re in the best spot possible to succeed over the long term.

This article isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

What is asset allocation?

It’s a term that might sound confusing, but it’s simply a strategy for investing.

It’s all about building an investment portfolio that best matches your objectives, risk appetite and target returns. This is achieved by investing in a mix of asset classes like shares and bonds.

Below, you can see examples of how your portfolio might look, from a conservative portfolio to an aggressive one. These portfolios don’t all include cash – however, it’s important to build up an emergency savings pot before you start investing.

The importance of holding the right amount of cash

Once your portfolio’s built, you’ll need to regularly rebalance it back to its original weightings and risk level. We’ll explain more about this later.

If your circumstances change, we’d recommend reviewing your investment strategy and objectives. All investments should be held for the long term too – that’s at least five years.

What are the different types of assets?

While lots of investors access them through funds, broadly speaking, assets can be split into three main categories – shares, bonds and alternatives, like gold. And while there are lots of ways to define an asset class, it’s their characteristics that really matter.

Investments in an asset class are broadly similar to one another. For example, UK shares are one asset class. They all give investors part ownership of a company and are listed and traded on the London Stock Exchange.

We can separate asset classes by looking at what’s different from one to another. For example, UK corporate bonds aren’t listed on the stock exchange and don’t provide investors with ownership of the company. They pay out a fixed income, while dividends from shares can vary and aren’t guaranteed. It’s these kinds of differences that make shares and bonds two separate asset classes.

Lastly, the addition of an extra asset class to a portfolio should offer the potential to improve the expected return for the same level of risk – allowing you to target the most reward from your risk. This is an important characteristic for an investment strategy, and is why diversification is often championed by many investors.

Time to start thinking strategically

Here are the four steps you need to take to create a portfolio that's right for you.

1. Know your objectives

It’s important to know what you want to achieve by investing. This might seem obvious, but it’s something that can go under the radar.

For most of us, we invest with a common goal – to improve our financial future and give us an income in retirement. But you can also have other key milestones along your investment journey that you need to plan for. Things like building a house deposit, or contributing towards your children’s university fees.

Understanding your objectives will allow you to define your investing time horizon, your risk appetite and the level of returns you're aiming for. This will help shape the overall risk profile of your portfolio.

2. Choosing your risk

Risk is personal. The person best placed to decide how much risk to take is you.

Choosing the right level of risk can be a difficult decision. To help, your starting point should be your long-term financial needs and not your short-term views of the market.

Your strategy – and your mindset – should be robust enough to withstand the inevitable ups and downs of markets. Remember, a financial adviser can act as a fresh pair of eyes and help you make the right call.

As a general rule, investors who are many years away from retirement can afford to take greater risks by investing more in shares. For those approaching retirement, it’s sensible to gradually lower the amount invested in shares by increasing their exposure to bonds, whose returns are typically less volatile.

It’s important to remember though, on average, we live for over 20 years after stopping work, so most of us should continue to hold some shares well into our retirement.

Learn how to de-risk your pension for retirement

3. Selecting your assets and investments

Picking the right mix of shares and bonds is arguably the most important part of the process.

Shares are riskier investments than bonds. But if you’re looking to grow your money, or haven’t yet saved enough to meet your financial needs, you should consider taking more risk to try and achieve the higher returns needed to reach your goals.

Greater risk means greater volatility though, so you’ll need to be comfortable with the market ups and downs you should expect along the way.

In contrast, high-quality bonds tend to provide a relatively predictable and more reliable source of income. So if, for example, you’ve already built a sizeable retirement pot, holding a larger portion of your investments in bonds is a sensible option. Of course, past performance isn’t a guide to the future.

If getting your share-to-bond ratio right is the most important part of your investment strategy, the second most important decision is to diversify.

Your portfolio should benefit from diversification because it’s exposed to different types of risks. For example, investing in shares in developed markets comes with different risks to investing in shares in emerging markets.

Once you’ve decided how much to invest in each asset, you’ll need to select investments within each asset class.

For any one investment, risk and return are two sides of the same coin. But when you combine different investments, it’s possible to lower expected risk, without sacrificing expected returns. Before you invest, make sure you understand the specific risks of the investment.

By investing in a mix of asset classes – and various shares and bonds – across different countries, industries and companies, you’ll be best placed to reap the rewards of diversification.

4. Maintaining your asset allocation

To help keep your portfolio on track to meet its objectives, you’ll need to make sure it’s rebalanced regularly.

Rebalancing involves selling a little of what’s done well and reinvesting elsewhere – assuming your risk level and objectives haven’t changed. That way, you’ll stick to your strategy, keeping the ratio of different asset classes in your portfolio close to their target weights over time.

Sometimes that will mean selling bonds and buying shares, and sometimes the opposite. You might also want to rebalance between individual holdings. If one of your investments does especially well, it might become a larger portion of your portfolio than you initially intended.

HOW TO REVIEW YOUR INVESTMENT PORTFOLIO

Putting principles into practice

Understanding your investment strategy is one thing. Sticking to it is another.

In times of increased volatility, it’s important for investors to hold their nerve and think long term. History tells us market falls have tended to happen around every five to ten years, but it’s impossible to predict exactly when they’ll happen or when they’ll rebound.

By selling your investments after they’ve fallen in value, you miss out on the potential for them to bounce back when prices eventually recover.

We don’t know what’s around the corner. However, we do know investing for the long term and sticking to your game plan gives you the best chance of achieving your goals and securing a better financial future.

Throughout this issue of the Investment Times, you’ll find plenty of ideas to help you build a portfolio, including the biggest market of them all – see why every investor should consider the US stock market. If you’re looking for income, explore the world’s leading income market.