But, the DIY route can be challenging as it involves making all your own decisions about the assets you choose to hold.
Some of the most popular questions I'm asked by both DIY investors and national press journalists include:
- 'Where should I invest my money?'
- 'How much should I invest in bonds?'
- 'How much should I invest in equities?
- 'Which countries should I invest in?
This article (and the tool within it) finally answers all those questions in seconds.
The benefits of a diversified asset allocation
The problem we are trying to solve is portfolio asset allocation. Whether you are using tracker funds, such as ETFs, or active funds (those with a fund manager) it is advisable to build a diversified portfolio. Diversification helps you avoid 'putting all your eggs in one basket'. There are several ways to diversify a portfolio (by asset type, geography, and sector type) to reduce exposure to a single asset or asset class. By diversifying your portfolio you ensure that all of its constituents do not move in tandem. So for example, if the part of your portfolio exposed to UK company shares falls in value, then the portion of your portfolio exposed to bonds may in fact rise. This will offset some losses and reduce the investment risk within your portfolio. So what is the optimum portfolio asset allocation and how do you build an investment portfolio?
Best free investment asset allocation tool
Building a diversified portfolio has been notoriously difficult for investors. In order to solve that problem we spent a lot of time and money building our free investment asset allocation tool. The best investment asset allocation tool should be based upon as much quant research as possible and produce an asset allocation with a strong performance track record.
To do this we based the asset allocation model upon Vanguard's hugely successful Vanguard Lifestrategy fund range. The asset allocation calculator then suggests an example asset allocation based on your attitude to risk and age. The results are not to be deemed as advice or a personalised recommendation, but it does show you how one of the leading investment management companies in the world invests billions of pounds of investors' money.
So, based on my age and attitude to risk, the portfolio asset allocation tool suggested the following example portfolio:
- UK Equities 18%
- Global Fixed Interest 26%
- European Equities 10%
- Japanese Equities 5%
- Asia Pacific Equities 2%
- North American Equities 27%
- American Emerging Equities 0%
- European Emerging Equities 0%
- UK Gilts 4%
- UK Index-Linked 3%
- UK Corporate Fixed Interest 2%
- Global Emerging Market Equities 3%
What are the best investments to buy?
Once you decide upon an asset allocation you then need to buy the underlying investments. While you could invest in individual assets such as company shares, by investing in funds (passive or active) you benefit from further diversification as each fund will hold shares, for example, in hundreds of companies in different sectors. If you want to find a proven way to choose investment funds themselves then I have produced a short series of emails to show you.
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Appropriate independent advice should be obtained before making any such decisions. Leadenhall Learning (owner of MoneytotheMasses.com/80-20 Investor) and its staff do not accept liability for any loss suffered by readers as a result of any such decisions.
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