August 22, 2014

How to build an investment portfolio: key tips

With interest rates on cash at record lows, savers may be wondering if now is the time to consider taking on additional risk in the pursuit of better returns.  Knowing where to start can be a daunting task for DIY investors and so James Bateman, Head of Manager Selection at Fidelity Worldwide Investment, shares some tips on the things to consider when building an investment portfolio:

  1. Capacity or tolerance to risk: “The first question an investor should ask is how much risk they are willing and able to take. The fundamental rule when investing is ‘with the potential for higher returns comes higher risk’. Consider to what extent you can tolerate the inevitable ups and downs of the stock market. Once this is established, it will help you to establish the level of risk you are willing to take.”
  2. Time horizon: “Interrelated to risk is the investment time horizon. Are you saving for something specific such as a child’s education or something less definite such as a rainy day?  If there is a chance you will need to sell your investments without warning, consider investments with a smoother return profile (that is, smaller degrees of short term up and down swings). Conversely, if you are putting money aside for something that is a long way in the future, or are confident that you won’t need to cash in investments unexpectedly, it may be worth accepting more short term volatility in the hope of higher long term returns.”
  3. Control: “Next decide if you are willing to pick individual stocks or would prefer to invest in funds.  With such a wide universe to choose from it is difficult for investors fully research and understand individual companies to invest in. Understanding the complex world of government and corporate debt, for bond investing, is even trickier. Funds managed by experienced investors and backed by a large team of experience analysts, give investors the opportunity to invest in a wide variety of companies without having to do all the legwork.”
  4. Diversification: “Long term savers need to consider how to split their money between asset classes, geographies and fund managers and when to increase and decrease these allocations. These are important investment decisions that can have a substantial impact on the value of a portfolio. You might prefer to select a single fund so that all of these decisions are made for you – such as a multi-asset or multi-manager fund, which provides an essentially ‘one fund’ portfolio based on your desired risk and return.”
  5. Review: “Once invested, a continuous process of review and reassessment is important – investors shouldn’t hold on to bad decisions, but equally they shouldn’t sell out of underperforming funds or asset classes just before they rebound. It should be remembered that investing is for the long term, and that volatility is the price to be paid for potential gains. But a carefully constructed portfolio, beginning with an understanding of risk tolerances, should provide a level of volatility that you are comfortable with, as well as meeting your long term return objectives.”