Create Your Own Portfolio
Creating your own portfolio using our Cofunds Investment tool has never been easier, but what if you have never done this before? Well, we can guide you through the process with some key golden rules and steps to completion.
The Golden Rules to Creating an Investment/ISA Portfolio
There are a few golden rules that you should think about before committing to buy and build your portfolio. These are the dos and dont's of building your own portfolio:
- Consider your objectives. Savings are for the short term, investing is for the long-term.
- Accept that the value of your investments will rise and fall.
- Avoid the temptation to risk all your money in one area of the market - diversify!
- Remember risk and return are closely linked.
- Ensure your investments reflect your goals and attitude to risk.
- Review your portfolio every six months.
- Be too cautious. Accepting a degree of volatility is key to generating long-term returns.
- Be distracted by noise. It's impossible to judge short-term market movements but don't let this put you off.
- Chase performance. Most investors go for the flavour of the month but look at funds with the potential for steady growth year after year.
- Pull out if the going gets tough. Selling after a downturn is a sure way to lose money.
There are no guarantees of investment success any more and a diversified portfolio can reduce your overall risk. A well-constructed portfolio should be diversified in a variety of ways, including overall investment style, number of individual assets, geographical factors and the approach of the fund manager.
Step 1 - Understanding risk
The first step in creating your Investment/ISA portfolio is to find out what type of investor you are: low, medium or high risk?
- Lower Risk Investor - You prefer to put your money into safer investments, favouring cash and fixed-interest because you are more concerned about losing money than making huge returns.
- Medium Risk Investor - You accept more risks must be taken to generate better returns and happier to invest more. However, you would not feel comfortable investing all your money into stocks and shares.
- Higher Risk Investor - You will include more speculative investments in your portfolio, such as emerging markets or smaller companies, in the hope of generating excellent returns. This is only suited for investors who can afford to ride out big losses.
Be true to yourself and figure out what type of investor you are and stick to it.
Step 2 - Get to know your risk profile
Understanding the type of investor profile you are will help you feel more comfortable about investing online. Your long-term goals justify your investment style. If you're looking for regular returns in the form of dividends for example or you want to boost your income in retirement, investing for income makes sense.
If you have years to save then investing for growth might be more suitable as you will focus on companies whose profits and share prices are likely to dramatically outperform the stock market over the next few years.
With diversity in mind, its good to have a mix of both strategies within your overall portfolio. If you're more cautious you may be looking at an income-generated portfolio, whereas the high risk profilers would focus more on growth-focused funds.
Step 3 - Diversify
Diversifying your investments can reduce your risk when investing online. The Cofunds Online Investment Platform allows you to develop your own portfolio and diversify your funds as much as possible. When purchasing and diversifying your funds it commonly makes more sense to invest in collective investment funds, where money from numerous investors is pooled and invested by a professional fund manager. Being an investor in these funds can benefit you from increased diversification, economies of scale reducing the trading costs and potential risks. Pooled investments like OEICs can invest in a variety of asset classes, but the four main areas are equities, bonds, property and cash.
Whatever type of investor you are, diversification is key. Individual investments won't generally rise and fall at the same time so having this diversified portfolio means you are building an element of protection into your portfolio to safeguard you against tougher environments.
Step 4 - Choosing your funds
Choosing your funds is the best part of creating your portfolio and should be considered carefully. These are our top tips for choosing you're funds to place in your investment:
- Invest in other markets - Just because you're based in the UK doesn't mean you only have to invest in UK funds. A lot of investors are now investing in global markets such as China, India, Russia and Latin America. Although funds investing in these markets have done well they are still considered higher risk and it may be more sensible to pick a fund that invests across the globe. If you are interested in this but not completely confident to do it on your own, speak to our advisory company.
- Be confident in your decisions - Finding a fund manager that can perform consistently can be a challenge so be confident in your choice.
- Track performance - A good performance track record is no guarantee of future success. It would be worth checking their success over three, five and seven year time frames to judge how they have done in different market conditions. Try to seek out funds that are consistently top-quartile, meaning they are always in the top 25% when compared with other funds in their sector.
- Fund manager's objectives - Research and updating your knowledge of your fund manager's objectives can help you find out information such as whether they invest their own money in the fund. Those that do, of course, have a vested interest in their success.
Step 5 - Asset Allocation
Why does Asset Allocation matter?
Asset allocation matters as different types of investment perform in different ways. In very general terms, riskier investments, such as equities, should provide the best returns over the long term, but they will also be the most volatile. Combining different types of investment via asset allocation in a portfolio can help to even out these swings in value, especially if they are "non-correlated" (i.e. their prices move independently). This is why it usually makes sense even for growth investors to have some exposure to bonds and cash, even though their long term potential is less than that of equities.
The Asset Allocation of a portfolio is reckoned to account for over 90% of the returns and has a direct impact on the level of risk. If you have an investment timescale of 3 years you should take much less risk than if you have over 20 years to make regular savings. The choice of asset allocation model depends on your attitude to risk and your requirement for income. Our reccomended Asset Allocations for part of our Risk Profiling Tool.
Asset Allocation and Market Timing
Market timing plays a minor role in investment performance compared to Asset Allocation and we strongly recommend investors avoid the temptation to try and second guess the markets. Contrary to popular opinion, even professional investors cannot predict short term market movements with any consistency and successful investing is not based on timing decisions.
Step 6 - Regular Monitoring
The process of building a portfolio mustn't end when you've invested your cash. After all, it's your money and you wouldn't just leave it hanging around would you? To get the best from your investments and protect your cash you need to regularly review them, so read monthly updates from managers and do a proper review every six months.
You shouldn't automatically ditch fund managers as soon as returns fall but it's useful to see if they have a justifiable reason for periods of poor performance. If a fund consistently under-performs it's peers you may decide to switch.
If you feel you need any advice from a professional advisor, please contact Best Price Advice on