Considerations when building an investment portfolio
Creating a balanced, diversified investment portfolio
It’s quite common to build up an investment portfolio little by little, accumulating an assortment of holdings over the years, each one chosen on its individual merits. But any good investment strategy should start with a plan based on your aims, timeframes and how much risk you’re willing to take. That way, you can start building up a portfolio that is right for you and your circumstances. And, crucially, you can ensure it is well diversified and balanced.
This means avoiding putting all your eggs in one basket. Instead, in order to reduce the risk of your portfolio under-performing or losing money overall, you spread your money between different kinds of investments, known as ‘asset classes’.
These typically include shares, government and corporate (company) bonds, property and cash. Even within one of those types of investment, you can still diversify. For example, by choosing shares in different sized companies, sectors and regions of the world.
A diversified portfolio doesn’t guarantee you’ll be protected from losses. But it can help lower your risk as the values of different types of assets don’t always move in the same direction. In a diversified portfolio, a fall in the price of one investment has less of an impact overall, helping you to keep your calm, stick to your plan and take a step closer to achieving your goals.
But there are more considerations that need to be made beyond diversification. For example, you need to consider how much investment risk you’re prepared to accept. Typically, if you have a long-term plan you have time to ride out the peaks and troughs, enabling you to potentially take on more risk. If your risk tolerance is low, you might want to consider a portfolio that has a lower weighting towards shares, for example. And while investing in different regions is one way of diversifying, to reduce the impact of stock market movements, investing in some countries can add extra risk to your investment.
There are also other factors to consider when building a balanced portfolio, such as tax. You should always take into account the taxation treatment of different products when making your investment choices and considering how to diversify your portfolio.
If you want more help understanding risk and diversification, consider getting help from an NFU Mutual Financial Adviser.
Recent years have seen more focus on how investors' money works in a sustainable way. This is commonly referred to as Environmental, Social and Governance investing.