An investment portfolio is a set of assets, financial products, and investments selected carefully to ensure the forecast returns, downside exposure, and product types match your requirements in terms of income, timescales, and potential risk.
There are countless products you might include in your investment portfolio, and the right mixture depends very much on your specific objectives and expectations.
Understanding asset classes, investment product types, and the opportunities and risks present is important, allowing you to diversify and make long-term investment decisions based on a customised strategy.
What Is an Investment Portfolio?
Conventional savings accounts can certainly form part of an investment portfolio. Still, the key contrast is that investing involves putting capital into a range of products which carry an element of risk, which could include:
- Stocks and shares
- Bonds
- Currencies
- Commodities
- Cash or equivalents
You can also invest in property, your own business, and other physical assets, so a portfolio doesn’t necessarily need to comprise only financial products. It can also be adjusted over time if your attitude towards risk, or any other circumstance, changes.
For example, if you have a portfolio where the risk linked to an asset has risen steeply, or you want to minimise the potential to lose invested wealth as you approach retirement, you might opt to remove some assets from your portfolio, reinvest in others, or select alternative sectors with less volatility.
The Difference Between Saving and Investment
Saving is not the same as investing because, generally, you do not have any risk of a capital loss. It is worth being conscious of the limitations of consumer deposit protection schemes in your country of residence that could mean savings will be lost if a financial institution fails.
Likewise, saving is not without risk at all, even if all your capital and interest returns are protected. Inflation means that, inevitably, money slowly depreciates. Interest earnings are rarely greater than inflation, which means relying solely on savings will mean your overall wealth reduces.
The goal of saving is to put money aside and earn nominal interest. Investment aims to grow your wealth, earn a favourable profit through returns (which could be in the form of dividends, interest, or appreciation), and preserve the overall value of your portfolio.
How to Build an Investment Portfolio
Every investment portfolio is unique and should be built on thorough planning, forecasting, research, and market knowledge. Investors can create a portfolio from scratch independently, but professional advice is advisable to ensure they have sufficient guidance and insights to make confident decisions.
One of the first tasks is to consider asset allocation, which means the assets you choose align with your investment objectives, target returns and risk tolerance. For example, you could create a cautious, lower-risk portfolio and invest in a blend of assets, including a large proportion of fixed-income bonds, with some overseas and UK shares.
A balanced portfolio, with a weighted mixture of risk and returns, might include fewer bonds, and more equities, which are higher risk, but with the opportunity to earn far more than the interest rates linked to government or corporate bonds.
The best approach is to work through each element systematically, assessing:
- Asset classes, sectors, or products you understand or have sufficient knowledge of.
- The amount of capital you wish to invest, for how long, and at what risk level.
- Your anticipated timescales and investment returns.
Investment strategies outline each of these aspects and can help you make decisions based on your long-term objectives and expectations, rather than making investments on a whim or reacting to changing market conditions that may well course correct well within your time horizon.
Considerations for Your Investment Strategy
Numerous factors play a part in asset selection, creating an investment strategy, and calculating whether your existing portfolio assets continue to suit your objectives. The complexity of picking from a broad number of assets, or knowing how to offset risk by diversifying, is the reason many expats work with an accomplished financial adviser or wealth manager.
Although the right investment approach depends entirely on your objectives, wealth, and preferences, the list below covers some key considerations to bear in mind.
Risk Tolerance
All investments have risk, although, as explained above, saving is not a zero-risk alternative. Generally, the higher the risk, the higher the return, but investors need to balance these against each other to decide what level of risk they are comfortable with.
Lower-risk investments can be suitable for investors who wish to minimise exposure. Still, because the returns available are lower, the optimal solution may be to diversify. For example, if one investment has exceptional returns but is exposed to volatility, an asset in an opposing sector might offset possible losses.
Timescales
Timings are important because they can shape your portfolio in terms of the types of products you pick, when you expect to receive a return, or whether you are investing to generate ongoing income streams.
Investors saving for retirement may have a fairly long time horizon, where they wish to increase their wealth over several decades. In this scenario, the ideal investment products will be different from those for an investor who wishes to generate a return over the short term.
Products can be short, medium, and long-term and provide varied payouts, so knowing when you expect to draw on your investments is a starting point before you begin building a portfolio.
Investment Returns
Every investor aims to achieve as high a return as possible on their investment. Still, because of the risk vs reward factor, it is also important to establish the baseline returns you need to make on your investment to make it worthwhile.
A typical approach is for your wealth manager to create a budget to set out your plans, outgoings, retirement age and other factors to establish any shortfall you currently have and what income you need to generate through investment. From there, they can suggest products, markets and asset classes that are likely to provide the income you require without carrying excessive risk exposure and with compatible payout timescales.
Finally, once you have a customised investment portfolio and strategy in place, you will need to ensure this is managed and monitored carefully since any changes to returns, risk profiles, or asset performance will require attention.
A portfolio will naturally adjust over time as your objectives evolve, and maintaining oversight will ensure you can continue to build your portfolio while adhering to your strategy.
Please get in touch with Chase Buchanan at any time for more guidance about establishing an investment portfolio, creating a tailored plan, or deciding on the best ways to manage your wealth.
*Information correct as of February 2023