7 tips to help you build the perfect portfolio
By FundCalibre's Tony Yousefian
From fund managers to advisers to the everyday investor, in my experience we all forget the basics from time to time – often just when we need to remember them most! But some simple guidelines can help you give your money its best chance to grow.
Whether you're setting up for the first time or rebalancing after a few years, here are my seven top tips.
Are you taking too much risk? For example, if you are already in retirement, you may need to adjust your portfolio accordingly. If you still have a number of 'adventurous' investments, you may wish to consider reducing your weightings in these holdings. That way, you can realise some the gains of previous years and reduce the overall risk of your portfolio so you're not placing too much of your future income in jeopardy.
Are you taking too little risk? If you're investing for a retirement that's more than 30 years away, for example, you may want to consider an 'adventurous' or a 'dynamic' portfolio, with few higher risk, higher potential return investments (such as growth-focused equity funds or perhaps a global or an emerging market fund). The longer the time horizon before you need to withdraw your money, the riskier you can afford to be as you can ride out a few bumps and dips along the way. Although, of course, your personal attitude to risk is of paramount importance.
Are you really a risk taker? While a higher-risk approach is generally advocated for those with a greater amount to invest and a longer time horizon, an ability to accept risk is also important. It is no good deciding that you are in a position to take a higher-risk approach, if such action causes endless sleepless nights when markets fall. You must be comfortable with short-term losses and happy to invest for a long period of time to think of yourself as an ‘adventurous’ investor, for example. If swings in valuation worry you and/or you are closer to retirement, you might prefer to take a 'cautious’ stance.
Do you have enough different investments? One of the ways to reduce the volatility of your portfolio, apart from selecting funds with a lower risk rating, is to diversify your holdings. The greater the spread of funds, the more you reduce your risk. But keep in mind, spreading your assets across too many funds means those that perform strongly will have less impact on overall performance.
How's your balance? The greater your spread of sectors/asset classes, the less your portfolio will be subject to swings in market sentiment. Even if you have a strong personal preference for a particular sector (for example, you might love technology stocks or be betting on a commodity bounceback), it is not a good idea to plough all your money into it. You could give a greater weighting to your preferred sector, but still keep a percentage of your total portfolio in other areas too.
Do you have too many different investments? The number of funds which should be held within a portfolio will vary depending upon the amount invested. As a rough guide, I always say a reasonable number would be around 10 funds in a portfolio of over £30,000 and 15-20 in one over £100,000.
Don't set and forget! Remember to monitor your portfolio, at least on an annual basis, to prevent sector and country biases creeping in. Go back to your original goals and the sector and country weightings you were trying to achieve. As some of your investments perhaps outperform and others underperform, your portfolio weightings may have shifted. This could mean you've accidentally taken on a higher or lower risk profile than you intended and you need to rebalance – for example, if a volatile fund has done particularly well, you may want to sell some of your holding to realise those gains and re-invest it into something lower risk.
Where to next?
- Investors behaving badly: are you making these 6 mistakes?
- See all our sample portfolios
- Research all Elite Rated funds
- How to choose a fund
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Tony's views are his own and do not constitute financial advice.
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