So what are the top tips for creating and managing a so-called successful investment portfolio. Whereby your investment portfolio may contain varying asset classes such as cash, bonds, stocks, funds, investment trusts.
However creating and managing how that portfolio is run involves a lot more work than simply investing your money.
There is no specific portfolio that suits all investors, it comes down to your knowledge. Attitude to risk and your appetite to control where you make investments.
This will depend upon your investment horizon, what are your short, medium and long term goals and reasons for investing.
What may your end game be ?
1: could it be mortgage free ahead of schedule,
2: getting the children through university or on the housing ladder
3: the idea of retiring early or becoming financial free so you don’t have to work.
4: leaving your current employment, and working on a side hustle
5: Working in employment on your own terms and conditions.
Step 1: Don’t put all eggs in the same basket
One of the simplest things you can do when creating a portfolio is to diversify across numerous different sectors, indexes and geographical locations to reduce your risk level.
Obviously the more varied positions you hold the less individual risk each stock or fund will be subject to.
If you only hold specific shares they would be more riskier than an ETF covering all shares within that certain index. Let’s say the FTSE has 100 shares and the S&P has 500 shares within that portfolio.
It all depends upon how many shares you can manage. What level of time or activity does it take to look after your portfolio on a day to day basis. Experts think that between 20 to 30 stocks is more than enough for most investors to look after.
My own personal preferences:
I personally own 10 stocks and 10 funds within my stocks & shares ISA. For my SIPP I own 10 stocks and 5 funds to give me greater diversification. That is an amount I am happy to manage in a hassle free way and I just monitor at the end of each month.
Your own limits will come down to your attitude to risk. Along with the amount of time and level of administration you may wish to partake in.
For my workplace pension, I am limited to the funds available. So I kept it simple and invest each month in a global growth fund.
Bear in mind that the more stocks you own. The greater the time required to look after your portfolio, reading reports and trading statements etc.
It may well be that you concentrate on shares, companies and sectors that you know about. Or certain industries that you are comfortable investing in.
Then limit the amount that you hold for a specific share. I invest no more than 10% of my portfolio into any 1 stock.
When starting out you may buy a simple ETF or global growth fund to spread across all sectors. As your knowledge increases you then venture into individual stocks or specific companies.
Or your platform provider can offer simple investing strategies. Along with low cost funds based upon your risk profile such as managed, medium or adventurous funds.
Step 2: Take a long term view
Avoid what we call Mr Market or short term noise. The market will go up and down each and will continue to do so moving forwards. Day to day events are out of your control so don’t try and time the markets.
Remember time in the market is more important than timing the market.
Building a sensible asset allocation based on your risk profile. It is crucial to achieving your long term inverting aims and goals.
A simple strategy may be linked to your age. Experts reckon, you should have a proportion of your age equal to 100 minus your age. So if you are 35 you should have 35% in bonds and 65% in stocks.
As you get older you should reduce your exposure to stocks. Then invest more towards bonds which is considered a less riskier asset. This is not set in stone, it depends on your own personal preference.
In the past most providers offered simple funds such as 80/20 or 60/40 to help people on their asset allocation strategies.
Or a workplace pension may offer something such as a lifestyle strategy, or target date funds which works in the same process but automatically de-risks investments as you get older.
Step 3: Keep costs and management fees low:
One of the biggest factors that hinders investors and their respective levels of return is fees and charges, which should be kept to a minimum.
It may be that you tinker with your portfolio, but you don’t have to buy every share or fund out there.
So before you purchase any investment do your background research and due-diligence ahead of buying it will reward you in later years and think of owning that stock for the next 5 years or more.
Every time you buy and sell a stock or fund you will incur dealing fees. Also remember about setting a minimum amount each time you buy an investment.
Most platforms may charge you around £ 10 to £ 15 plus step duty for each purchase. Can you take advantage of regular investing days offered by your provider. I will pay £ 1.50 to buy a certain stock on set date each month irrespective of I buy £ 100 or £ 500 the reduced feee is the same amount, thereby savings excessive dealing fees.
So it may be that you only buy a particular investment when you have a certain sum saved up ahead of investing, let’s say a minimum of £ 100 or £ 500 to make it cost effective.
4) Learn to re-invest all the dividends you receive:
Another thing, I will do is to re-invest all dividends back into my portfolio. However, I will only re-invest back in that specific share if the sum is at least £ 50 to save on excessive dealing charges, my provider will allow me to re-invest at a cost of £ 1.50, 2 days after receiving initial dividend payment.
When buying a share you should consider the different prices on offer such as the bid or spread amount. For larger shares such as those in the FTSE 100 will have a reduced difference, shares listed in say the AIM market may have much wider differences between buying and selling prices. Which could have a dramatic effect of the number of shares you purchase.
When thinking of investing in funds do you use simple a simple low cost ETF with fees ranging from 0.1 to 0.5% or do you pick actively managed funds where funds may be in excess of 1%, and can those providers justify those fees if they give poor investing returns.
So try and kept buying and selling costs down to a minimum. It may not seem much when starting out but over time it will have a great effect on your investing returns over many years due to the power of compounding.
Step 4: Rebalance on a regular basis:
The idea of rebalancing is to minimise your risk and to see if you are track to meet your investing targets, returns and financial goals. Are your moving in the right direction and is your portfolio increasing in value year on year.
Don’t look at your portfolio on a daily basis as you may see a see of red for losses. It may only dishearten you in the short term creating undue worry or stress. Or sea of green for profits, which may create short term euphoria whereby you think it will carry on like that in future.
You will have good days and bad days, good months and bad months but think long term. How to react to market swings is more important to you, depending on your temperament.
It may be that you record your portfolio valuation each month or each quarter and then make changes accordingly. I personally record my progress at the end of each month, but I will then do an annual review at the end of December ahead of the new year.
You will find that some sectors or markets have performed better or worse than others, and you may rebalance your portfolio accordingly. But don’t make drastic changes on short term events, it may be that you do some tinkering and tweaks or you may change where you invest future contributions into your portfolio. Could it be seen as a good buying opportunity to buy cheaper shares than you originally purchased in the past.
Or a certain sector or country may become somewhat too heavy compared to others.
Key Conclusion:
Above all, remember to consider why you are investing in the 1st place and what are your investing goals and aspirations. You too can achieve your financial goals and aims if you take the appropriate steps and create an action plan. Investing isn’t a get rich quick scheme, so learn to enjoy the journey !
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