How to Build a Portfolio
Choosing a fund should be the last thing you do in the investing process, building a portfolio. The whole process of building a portfolio should be in three parts: suitability, asset allocation and fund selection. After that you should review your portfolio regularly.
Where should you start?
The “start” isn’t buying a fund because you’ve seen a compelling advert, or received a glossy email promotion.
Nor is it buying a fund because a friend said it has done well for him; nor buying a fund because it is the top of some league table.
Its not even buying a fund because it is recommended by an apparently qualified source, or independent adviser (or even us!).
Yet this is what most investors do, without much greater thought. It might work out for you - if it does it is more luck than judgement.
The “start” to building a portfolio, or selection of funds, has to be more thoughtful.
Have you bought a T.V. lately?
You would take into account the room size, where it will be placed in the room, the sound quality required, the connections you need, types of programmes you typically watch. You will know your objectives, and you will think about the context (the room). It would be the same if you bought a washing machine or oven, or new boiler. You will invest some time and thought into the purchase.
Better still, if that appliance doesn’t do as promised, or blows up within a certain time, you can replace it or get your money back.
Did you give this much time to your investments?
Where the sums involved were considerably greater? No? Yet if that investment “blows up” you have no recourse, but for the possibility of negligent advice (difficult to prove) or fraud (very rare).
Choosing a fund should be the last thing you do in the investing process of building a portfolio.
Start with a definition
A portfolio is a selection of investments designed to meet your objectives, within your risk tolerance. And note that it is a selection, a spread. This is not just so that you don’t have all your eggs in one basket - it also means you have a spread of different types of risk, by utilising “risk buckets”, as you will see.
The whole process of building a portfolio should be in three parts:
suitability, particularly allowing for your attitude to risk
asset allocation across your portfolio, balancing differing sectors and fund types
And after that you should ensure there are regular reviews, so you remain in appropriate asset classes and sectors, and the best possible funds.
This is part 1 of our 5 stage guide to building a portfolio. Parts 2-5 are below: