How to Get Started With Your Investment Portfolio? with Emilie Bellet
Today we're answering a question from one of our Money Matters Festival attendees who wanted more information about building her first portfolio of investments. Whether you're starting from scratch or looking to refine your strategy, Emilie Bellet is giving you a 10-steps checklist to understand and select your portfolio. We will be covering risk / reward, asset allocation and diversification, balancing a portfolio, passive approach with funds and also monitoring.
You can listen (20 min) and subscribe here:
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1. What is an investment portfolio?
Consider your investment portfolio as a basket holding assets expected to increase in value over time and potentially generate income. The aim is to grow your money and outpace inflation.
An investment portfolio typically consists of assets in four main categories: stocks, bonds, cash, and property:
Stocks represent ownership in a company and can be a powerful way to build wealth, particularly over the long term.
Bonds are debt securities/loans issued by companies or governments, offering stability to your portfolio, especially during uncertain times. However, high inflation can affect their performance.
Cash refers to money that is readily available for spending or investment. It provides liquidity and stability, allowing investors to access funds quickly and easily when needed.
Property (REIT): Property, often accessed through Real Estate Investment Trusts (REITs), involves investing in real estate assets such as buildings, land, or infrastructure. REITs allow investors to buy shares in portfolios of real estate properties managed by professionals.
“In the world of investment, there’s no one-size-fits-all approach—each of us has a unique journey. Choose a strategy that feels right for you, aligning with your dreams, your comfort level with risk, and your personal situation.”
2. what is risk?
When you invest money, there is inherent risk. While risk is often viewed negatively, it also presents opportunities for growth. Investments with higher risk potential typically offer the possibility of greater returns over the long term.
Risk tolerance refers to your ability and willingness to endure fluctuations in the value of your investments.
It's a balancing act between the potential for higher returns and the possibility of losing money. To assess your risk tolerance, consider three key factors: your goals, the time horizon for reaching your goals, and your comfort level with market fluctuations.
For example, suppose you have a longer time horizon, such as planning for retirement several decades away. In that case, you may be able to tolerate higher levels of risk in your portfolio because you have more time to weather market fluctuations. Conversely, if you have short-term financial goals or a lower tolerance for risk, you may prefer a more conservative investment approach focused on capital preservation.
When you invest, you hope your investments will appreciate in value. Since it's impossible to predict which assets will perform well in the future, diversification is key. This involves spreading your investments across different asset classes, regions, sectors, and styles (if you have active funds), reducing the impact of any single investment performing poorly.
3. Why can’t you just buy one share in one company?
Imagine you have a bunch of baskets, and you put some eggs in each. If one basket falls, you won't lose all your eggs at once.
In investing, it's the same idea. Instead of putting all your money into just one thing, like one company's stock, you spread it out into different things, like different stocks, bonds, or real estate.
That way, if one investment doesn't do well, the others can help balance it out, reducing the risk of losing all your money at once. It's like not putting all your eggs in one basket, but spreading them out to protect them.
4. What is the rule of 100 for asset allocation?
This rule suggests subtracting your age from 100 to determine the percentage of your portfolio allocated to stocks. However, as people are living longer and retirement may be further away, some experts suggest using 110 or even 120 instead of 100. This means having a larger proportion of stocks compared to bonds.
For example, if you're 30 years old, following the rule of 120 would entail allocating 90% of your portfolio to stocks and 10% to bonds (120 - 30 = 90). Similarly, at 40 years old, you might consider a distribution of 80% stocks and 20% bonds.
This suggests that you should consider taking on more risk while you are young and gradually decrease risk exposure as retirement approaches, due to the reduced ability to generate income and the limited time available to recover from investment losses as you near retirement age.
5. What is passive investing?
Passive investing, as advocated by Warren Buffett, involves investing in funds that track market indices like the S&P 500 or FTSE100, instead of trying to beat them.
In contrast, active investing involves managers attempting to outperform the market by selecting stocks or timing trades. However, research consistently shows that most active investors fail to beat the market after accounting for fees.
That's why we favour passive investing, especially for newcomers—it's simple, cost-effective, and offers broad market exposure and diversification. Remember, even with passive funds, we need to actively manage our portfolio and rebalance periodically, but avoid overreacting to short-term market fluctuations, as this can impact returns. It's usually best to set our strategy and check in regularly rather than making frequent changes.
As Buffett famously said, "By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals." Once we've decided on our allocation, let’s delve into funds, even if it can be daunting!
6. what can you invest in?
Index funds and ETFs are popular choices for passive investors because they offer broad market exposure with low fees.
These funds hold lots of different stocks or bonds, so you're not putting all your money into just one company or investment.
By picking a mix of these funds, you're spreading out your money across different parts of the stock or bond market.
You can implement the rule of 120 by investing in equity funds and bond funds rather than selecting individual stocks and bonds! For equities, opt for diversified index funds or exchange-traded funds (ETFs) that track broad market indices, providing exposure to a wide range of companies across different sectors and regions. Look for low-cost funds with a solid track record and consider starting with well-established names in the industry. For bonds, consider bond index funds or ETFs that offer exposure to a mix of government and corporate bonds, with varying maturities and credit qualities to diversify risk. Again, prioritise low fees and reputable fund providers.
7. do your research
It’s a good idea to leverage online investment platforms that offer pre-made portfolios or model portfolios tailored to different risk profiles. These portfolios often include a mix of equity and bond funds curated by investment professionals, making them a convenient starting point for beginners.
You can also use investment research websites and tools to compare fund performance, fees, and other key metrics. Trustnet and Morningstar are good options to consider. Look for funds with low expense ratios, consistent performance, and a history of closely tracking their respective indices. Pay attention to fund ratings and reviews from reputable sources to gauge investor sentiment and confidence in the fund manager's abilities.
Then there are multi-asset funds. When we invest in a multi-asset fund, we're putting our money into a mix of different things, like stocks, bonds, and cash, all in one go. This diversity brings value, as assets will behave differently depending on the market context. Combining decorrelated assets may make our portfolio more resilient to face an uncertain future. They're like a middle ground between risky stock funds and safer bond funds, offering decent growth potential while keeping the risk lower than going all in on stocks.
When considering the different types of funds, we can choose between accumulation and income funds; it's all about how we want our returns. Accumulation funds automatically reinvest any profits back into the fund, aiming to grow our investment over time.
Income funds, on the other hand, pay investors regular dividends or interest, providing a steady stream of income.
Both types of funds can be trackers, meaning they passively follow an index, like the FTSE 100, to mirror its performance.
8. How much should you invest?
Determining your investment amount depends on your financial situation—whether you're starting to save, saving regularly, or nearing retirement. It's crucial to spend less than you earn, align your investment strategy with your goals, and consider your risk tolerance.
Consider what you want to achieve and how much you can realistically set aside for investing. Even small amounts can grow over time due to compound interest!
Whether you're starting with £200, £500, or £1,000 a month, the journey toward your financial goals begins with that initial investment.
Assuming a 7% rate of return, after 20 years, monthly investments of £100, £200, and £500 could potentially grow to around £52k, £105k, and over £262k, respectively. This demonstrates the power of consistent investing and letting your money work for you.
Reaching £100k in investments is a significant milestone as the compounding effect accelerates, leading to faster growth thanks to compound interest.
Here are some examples:
If you invest £200 per month:
To reach £100k: 19 years and 11 months
From £400k to £500k: 3 years and 1 month
From £900k to £1m: 1 year and 7 months
Total time to reach £1m: 49 years and 11 months
If you invest £500 per month:
To reach £100k: 11 years and 3 months
From £400k to £500k: 2 years and 10 months
From £900k to £1m: 1 year and 6 months
Total time to reach £1m: 37 years and 2 months
9. Starting Small and Embracing Mistakes
Remember that investing is a journey, and it's okay to start with smaller amounts as we learn and gain confidence. We quite like the idea of getting started with small amounts and giving ourselves the right to make mistakes. You can then learn and refine our investment approach and become more knowledgeable investors over time.
By starting small, we can test different investment strategies, learn from any missteps, and gradually increase our investment contributions as we gain experience and understanding of the markets.
10. Monitor and review your portfolio
Keeping an eye on your investments involves regularly checking their performance. If they have deviated significantly from your original plan, adjustments may be necessary. This could include selling some well-performing investments and purchasing more of those that haven't done as well to maintain balance, much like adjusting the sails on a boat to stay on course.
It's important to resist the urge to constantly tweak your portfolio; sometimes, leaving it alone is the best strategy. It's essential to ignore the noise, especially on social media.
A portfolio isn't static; its allocation may need to be adjusted accordingly based on changing market conditions and your financial goals.
final thoughts
In the world of investment, there's no one-size-fits-all approach—each of us has a unique journey. Choose a strategy that feels right for you, aligning with your dreams, your comfort level with risk, and your personal situation.
Remember, what works for one person may not work for another. Do your homework, and don't hesitate to seek advice from financial experts—they're here to support you every step of the way!
Get ready, because we're gearing up to launch the next cohort of our revamped Investing Bootcamp! Don't miss out—make sure you join us and subscribe to the newsletter in the show notes if you're looking for additional support on your investment journey!
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