Investment Portfolio

Building an investment portfolio is often made to sound like a long and arduous process.

I sometimes see %s to three decimal places, with more components and moving parts than there are ingredients in a frozen pizza.

This isn’t the only way. Creating an investment portfolio can be simple, it can be fast, and it can be intuitive. Let’s explore how this can be the case in this article.

Just a word before we begin, this article contains my own opinion on a smart way to build an investment portfolio and comes from my own personal investing experience. This is not financial advice and nor should it be treated as such. This article is simply the sharing of common sense investing wisdom.

How to create an investment portfolio

Step 1: Create a high-level asset allocation between equities, bonds, and property

I’ve selected three of the most popular and basic asset classes to form the building blocks of this portfolio. Equities, bonds, and property form the backbone of virtually every professional investment portfolio managed globally.

Other asset classes I have purposefully excluded are:

  • Commodities
  • Structured products
  • Preference shares
  • Alternative investments (collectibles, antiques, wine, art, etc)
  • Investments in private companies
  • Personal loans

I haven’t excluded these because they’re bad investments necessarily, I just think that a basic portfolio doesn’t lose much by excluding them.

They bring complexity, they bring risk, and they introduce the need to have several accounts or relationships with multiple financial institutions. We want something that’s easy to manage, and there’s nothing easier to manage than a portfolio you can run from a single stockbroking account, right?

The general principle that I use to determine how to allocate my portfolio value between these three categories is to score my appetite for risk. If I want to go for higher risk, I’ll allocate 70% to equities, 20% to bonds, and 10% to property.

If I want to go for a lower risk, I’ll flip this around and go for 20% equities, 70% bonds, and 10% property.

If I feel like this devalues the place that property deserves in the portfolio, depending on the state of the property market locally, I may increase the property allocation by up to 20%, reducing the equity stake accordingly.

Step 2: Choose a sub-asset allocation within each high-level asset allocation.

This part can be as simple or complex as you need it to be. The high-level asset classes we’ve defined are very broad terms.

Bonds could mean ultra-safe government bonds, or they could mean junk bonds issued by a small private business.

Equities could represent shares in blue-chip companies on the NYSE, or they could represent a risky venture listed in the Bahamas.

Step 2 is about defining your asset classes with more detail to ensure that you get the types of assets that you want.

It might be that actually, you want a very broad mix, and in which case (see step 3), you could choose a fund that does just that. For example, you could aim for a geographical mix of equities and not be specific, and then use a fund which invests in worldwide equities.

However, if you do have a preference for the character of your investments, such as ‘I want shares in large listed UK companies’, then this is the step to add that colour to your plan.

Step 3: Choose a fund that corresponds to each sub-asset allocation.

Finally, it’s time to choose funds which line up to the sub asset classes that you have defined.

Personally, I’m a passive investor, so I look for low-cost index tracking funds which seek to mirror an index which matches by sub asset class.

For example, if I want my equities allocation to be 50% UK shares and 50% global shares, I’ll look for an index fund which tracks the FTSE 100 and one that tracks a worldwide equity index.

When purchasing more than one fund for an asset class, such as my previous example, you’ll want to pay close attention to any overlap between the two funds. A worldwide fund may also invest in UK shares, for example, leading to your allocation to UK shares being slightly higher than anticipated. To help with this, some funds track indexes such as ‘Global Ex UK equities’ which means worldwide equities excluding the UK. Very helpful!