This is the 6th episode of our Grow it series, which is a series that aims to introduce you to investing and growing your wealth. If you’ve watched the first 5 episodes you should understand the benefits of investing as well as understand investment risks, potential returns and taxation. You should also have insight into when you should use a financial adviser to recommend and manage your investments and when you don’t need to. You will also understand the benefit of using a tax wrapper such as a pension or an ISA to protect any profits or income that your investments generate from taxation. If you are going to grow your wealth then you want to keep as much of it as possible.
In this episode I am going to explore how to build an investment portfolio.
In the last episode I described different investment products as boxes with their own rules around accessibility and taxation. The three main box types I discussed were a stocks and shares ISA, a pension and a general investment account. Generally speaking the first two are the tax wrappers, through which most people will grow their wealth. When you choose assets to invest in, these go inside the boxes. Generally each box can contain the same investments if you so choose but that does not have to be the case, especially if each box has different investment objectives and timeframes.
As I mentioned in episode 4 of this series, if your finances are in order and are pretty straightforward, you have money set aside for emergencies, if you are employed, you are contributing to your company pension scheme and you have spare money to invest and a timeframe of at least 5 years then there are online services out there that not only recommend a diversified portfolio for you but also manage it, at a fraction of the cost of seeking financial advice These services are often referred to as robo-advisers.
I don’t like the term robo-adviser but it was coined by the mainstream media and seems to have stuck. In the past investing was the preserve of the wealthy. If you had wanted to invest you would usually have had to see a financial adviser in person who would then recommend an investment for you. The charges were expensive and your choices relatively limited compared to today. But the advent of technology, changes in regulation and increased competition have not only driven down the cost of investing but also democratised it and made it accessible to the masses. Go back just over a decade and it was suggested that you needed at least £50,000 as a lump sum before you would be taken seriously. Now not only can you invest from as little as £1 but you can even automatically invest the spare change from any card transaction you make. Or in other words you can buy a cup of coffee and the change rounded up to the nearest pound can automatically be set aside and invested for you. The point I’m illustrating is that it’s never been easy to start investing.
For those people who do not need to or want to seek full financial advice, robo-advisers offer a good solution. Some offer execution-only services which means that they do not recommend a portfolio that will suit your risk profile. You simply pick a portfolio you want, however many services do carry out a basic fact finding exercise, assess your attitude to risk and then recommend a portfolio for you and manage it. So everything is taken care of, all you need is to put money in as a lump sum and/or regular amounts over time.
Popular robo-advice services include Wealthify, Nutmeg and Moneyfarm but there is a link in the notes of this episode that takes you to our best-buy list of such services from which you can click through and read reviews of each proposition. Robo-advice propositions will typically provide a range of ready-made portfolios with risk levels that range from low risk to high risk. Low risk portfolios will hold a greater proportion of bonds and less equities. While the highest risk portfolios will exclusively be exposed to the stock market.
How they invest in different asset classes is usually via funds rather than investing directly in shares or bonds. In the next episode I talk about the different types of funds but ultimately if you plan to use a robo-advice proposition, asset allocation and fund selection is taken care of for you so you don’t have to worry about it.
The benefit of a fund is that if, for example, you wanted to gain exposure to UK equities,by choosing a UK equity fund you don’t have to pick the individual companies whose shares you will hold. A fund will instead invest in a wide range of companies, with only a small percentage of the fund’s assets being exposed to the fortunes of any one company. In turn this fund will only likely form part of a wider portfolio that is investing in different types of assets, further diversifying how your money is invested. While each robo-advice service is slightly different, typically they will manage the investment portfolio, altering the asset allocation while managing risk.
It is often possible to see the make-up of robo-adviser ready-made portfolios without investing any money by simply registering with the service. That way you can gain an insight into building a portfolio, for a given risk profile, even if you don’t choose to use a robo-advice service.
But what about if you don’t want someone to do all the work for you and you want to pick and manage your investments yourself. Of course I can’t give advice on how to build a portfolio to suit you but I can provide some guidance and useful tools. Firstly the longer your investment timeframe (the time before you need to cash in your investment) the more risk you can take within your portfolio. That's because if the value of your investments fall you still have plenty of time for them to recover. It is for this reason that young people may take more risk with their pension fund, which they can’t access until retirement, versus say an ISA portfolio that they plan to access much sooner. Conversely, the shorter your investment time-frame and more risk-averse you are, the more you will want to invest in low-risk assets.
This ties in with one school of thought which is that as you get older you might look to reduce your exposure to stocks (which are high risk), because you won’t have the luxury of time to allow your portfolio to recover should markets collapse. This has often been dubbed the age guide. It has even had some basic maths applied to it. In simple terms the age guide suggests that for someone with a medium attitude to risk, their investment portfolio should have an exposure to stocks that is approximately equal to the number 100 minus their age. So it follows that a 40 year old might have a 60% exposure to the stock market, with the balance in lower risk assets such as bonds. This is a crude rule of thumb and in no way investment advice. However, in the notes of this episode there is a link to an asset allocation calculator which we have created at Money to the Masses. If you enter an age into the tool it will apply the age guide principle assuming a medium attitude to investment. If you input an age of 50 it will show an example investment portfolio with an equity exposure of approximately 50%. The portfolio will have a diversified asset mix even within asset types, i.e. breaking equity exposure down by geography such as as North American and European equities. The results are based upon analysis of the asset allocation of some of the most successful passive investment funds. This is obviously not a personalised recommendation or financial advice. But a demonstration of how an investment asset allocation may look. You can then slide the bar to see the impact of taking more or less investment risk.
So assuming that you are deciding to go it alone and invest your own money, how do you pick the actual investments to put your money in, once you know your desired asset mix? In this series I am only dealing with the idea of funds. As explained, these collective investments make it easier to diversify your portfolio, by not putting all your eggs into one basket. I am not delving into direct share trading for example as this is high risk and not in my view suitable for most people. So it then becomes a case of choosing which funds to invest in. In the next episode I will explain the types of funds that exist (unit trusts, investment trusts and ETFs) as well as the terms passive and active investing. But ahead of that epsiode how can you research the funds you might want to invest in? For starters you need to choose an investment platform through which to buy the investments. Some of the biggest and best-known investment platforms in the UK are Hargreaves Lansdown, Interactive Investor, AJ Bell and Fidelity International. Think of these like investment supermarkets, where you can go online and choose a Stock and Shares ISA, pension or General Investment account, for example, through which you then invest your money. With most investment platforms you can buy funds or even direct holdings in shares. In the notes of this episode is a link to the best-buy articles of investment platforms for ISAs and pensions which link through to our reviews of each service. These reviews cover everything you need to choose a platform that suits you including investments options and costs.
To help you pick a selection of funds to achieve your chosen asset mix then many investment platforms will have research or shortlists you can use as a starting point. There are also investment research sites such as morningstar and trustnet which provide editorial content and tools to help you with your research. Also here at Money to the Masses we have our own subscription service called 80-20 Investor whereby I provide investment research and educate people on building and managing their own investment portfolio. I even run an investment portfolio live on the site to show you how you might use the research. It is not advice, it provides guidance so that users can make their own investment decisions. If you are interested, there is a free 30-day trial and you can find a link to that in the notes of this show.
It’s important to note that whether you decide to get someone in (i.e. a robo-advice service) to invest your money , seek full financial advice, or you decide to go full DIY it is not an either or decision. You can do both. For example you could let a robo-advice proposition invest most of your money and in time you may start to invest some of it yourself as you gain experience and knowledge. The only restrictions come if you are contributing to a Stocks and Shares ISA in the current tax year, as you can only do that with one product. But that doesn’t mean you can’t build up money with different products over time.
Also it is important that you should review your investments regularly (at least annually) to see if they still fit your needs and rebalance your portfolio if necessary. If you use an online wealth manager (as mentioned earlier) they will rebalance your portfolio for you (i.e. buy and sell holdings to ensure you maintain your original asset mix). They will also review the suitability of your investment allocation periodically. However, assuming you run your portfolio yourself you will need to monitor and review your portfolio on an ongoing basis. Research has shown that regularly reviewing your portfolio can not only reduce a portfolio's downside risks but also boost returns.
The most important thing with investing is to realise that it is accessible to everyone and there is a wealth of services and information out there that you can use to help build your wealth.
Thank you to our Grow It sponsors:
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