How To Build An Investment Portfolio

Anyone else dare to dream about a life other than being stuck in a 9 to 5 job? My husband and I talk, A LOT, about the freedom we would gain back and how we would use those extra 8 hours every day! Unless you’re very lucky and win a big lump sum, saving enough money to allow you to reach your financial dreams takes time and patience. However, let me introduce you to an investment portfolio! Creating an investment portfolio can be both exciting and intimidating, especially for beginners. A well-built portfolio reflects your financial goals and risk tolerance, setting you on a path toward financial security and growth. Here’s a step-by-step guide to building a portfolio that aligns with your personal financial goals.

Before we get started..

I want to add before we get started that this is not financial advice. Money is a very personal subject and if you are wanting personal advice then speaking to a financial advisor would be most suitable.

What is investing?

By definition, investing in something means you are donating some of your resources in order to see growth.

Commonly, investing is used to describe contributing money towards a business. That business will use your money to expand/ develop and (hopefully) they become more successful. The money that you initially invested should increase in line with the company’s profit, well that’s the idea.

The reality of investing is actually very risky. There is no guarantee that businesses will succeed and in fact the company could lose value or go completely bust. In other words you lose the money you invested. That is it is important to check you can afford to invest before building a portfolio.

Can You Afford To Invest?

The first step in building an investment portfolio is knowing that you can afford to invest. And the easiest way to do that is to budget your money. Check out my blog post on how to budget your money for more help.

Budgeting is the process of balancing your income and expenditure. In other words how much money do you make and how much money do you spend. If you have money spare after deducting all your expenditures then yes you can afford to start investing right away.

However if you can’t then do not worry and take your time. You have two options; either increase your income or reduce your expenditure. By doing this you will have more money left at the end of each month to invest with.

When should you start investing?

Simply put, the sooner you start investing the better! That is all thanks to two ideas; compound interest and inflation.

Inflation

Inflation is the general progressive increase in services and economy. Essentially it means the cost of living goes up.

Don’t worry, when I first heard all of this my mind was scrambled. So let’s say you have £1, currently that might buy you 4 Freddo frogs, at 25p each. Fast forward 5 years Freddo frogs might cost 50p and that same £1 can only buy you 2. That is inflation and unfortunately you can’t beat it. If you’re still unsure on inflation, then check out inflation calculators to get a real idea of how it could affect you.

The way to get ahead of inflation is to put your money into things with rates equal to or higher than the rate of inflation. And unfortunately there are none that are risk free. This is where compound interest comes in.

Compound Interest

Compound interest basically means that the interest you earn is added to the money you pay in. The next interest calculated will be based off of this total. Essentially it means you earn interest on your interest.

Let’s say you deposit £100 per month for 5 years and earn 7% average annual return, at the end of the 5 years you would have £7200. You have paid in £6000 and received £1200 in compound interest. Not a bad return, right? It beats leaving that £6000 to depreciate in a savings account.

The reason compounding works is because you’re investing in the stock markets longevity. There are ups and downs in the stock market but the overall trend is positive. The sooner you invest the longer you have to ride the wave.

Have a try with some compound interest calculators to figure out how much you could save using this principle (remember to use values representative of what you can afford).

Setting financial goals

Before you get started it’s important you define what you’re investing for. Are you saving for retirement, a deposit on a house, education, or a major purchase? Defining these goals helps determine the time and risk tolerance of your investment portfolio.

Short-term goals (1-3 years) typically require safer, more liquid investments, such as cash or bonds.
Medium-term goals (3-10 years) allow for moderate risk, often a mix of bonds and stocks.
Long-term goals (10+ years) have the potential to take on more risk, so you might lean more heavily into stocks or other high-growth investments.

Make a list of personal financial goals and establish how soon you will need the money. This is the first step in building your investment portfolio.

Understanding your risk tolerance

Risk tolerance is your ability to handle fluctuations in your investments’ value without panicking. Generally, those with longer-term investment horizons can afford higher-risk portfolios, while those closer to needing the funds may prefer lower-risk portfolios.

Aggressive investors tend to prefer more stocks, including high-growth or international stocks.
Moderate investors blend stocks and bonds to create a balanced portfolio.
Conservative investors favor stability and preservation of capital, often choosing bonds, cash equivalents, or dividend-paying stocks.

Once you understand your financial goals it’s easier to predict what your risk tolerance will be. It’s important that you are comfortable with your portfolio so make sure you choose your investments carefully.

Choose an asset allocation strategy

In other words, what should you invest in?

This part takes the most time and research. Understanding your options should be a crucial step in your investing journey. Different investments carry different levels of risk and choosing one you feel most comfortable with is important.

Asset allocation is the process of deciding what percentage of your portfolio goes into each asset type: stocks, bonds, real estate, and cash. It’s a crucial step because asset allocation often has a more significant impact on returns than individual stock choices. Here’s a breakdown of common asset types:

Stocks: This is a share ownership in a company. The price per share will vary depending on how successful the business is. The better it does, the higher the share price. Stocks are higher-risk with higher potential returns. They provide growth and inflation protection over time.
Bonds: This is essentially a loan to a corporation or government. Bonds tend to be less risky because you will get a date in the future where you are guaranteed to be paid your money back and in the mean-time they will pay you interest. They provide income and reduce portfolio volatility.
Real estate: Real estate investments, such as REITs, can diversify your portfolio and provide stable, income-producing assets.
Mutual funds: A mutual fund is like a mix of investments. Instead of you having to select individual stocks and bonds, you can buy a group in a mutual fund. It’s for this reason mutual funds tend to be less risky than individual stocks. It more risky than bonds.

Diversifying your assets

Diversification means spreading investments across various sectors, industries, and geographical regions to minimise risk. Even within an asset class, diversification helps reduce exposure to a single asset or sector’s underperformance.

Stock Diversification: Include stocks from different sectors like technology, healthcare, consumer goods, and financials.
Bond Diversification: Include bonds with different maturities, credit qualities, and types (such as government, corporate, or municipal bonds).

Consider using mutual funds for easy diversification. Usually you need to invest more money into mutual funds and in some cases it might be a condition in the investment. This tends to be because you are investing in a larger group of companies. If you can’t afford to make larger lump sum investment then one alternative is an exchange-traded fund (ETF).

ETFs and index funds allow you to own a broad range of assets at a lower cost and without having to buy individual securities. These funds track a market index (like the S&P 500) and provide exposure to many companies without needing to research each one.

Remember to consider your risk tolerance and timescale when diversifying your investment portfolio.

Monitor and rebalance your portfolio

A successful portfolio isn’t just a “set it and forget it” approach. As market conditions change, some assets may grow faster than others, shifting your asset allocation. Rebalancing ensures your portfolio stays aligned with your risk tolerance and goals. Many advisors recommend rebalancing at least once a year.

Your financial situation and goals may change over time, so your investment portfolio should evolve as well. As you age or reach milestones like buying a home or having children, it might make sense to adjust your risk tolerance and rebalance your portfolio.

Life events may also require revisiting asset allocation. For instance, as you approach retirement, a higher percentage of your portfolio might shift to income-generating, lower-risk assets like bonds or dividend-paying stocks.

Top tips

Use platforms such as Trading 212 to invest in stocks
Watch companies stock history and whether it has a positive or negative trend
Research companies share forecasts, they might announce dividend warnings or new product releases. Both will likely increase share price.
Investment management companies such as Vanguard are a useful platform for a more passive approach. Be aware they incorporate fees as they are managed.
Only invest what you’re willing to lose. The stock market can go down as easily as it goes up.

Finally..

Building a portfolio is a journey that involves setting clear goals, knowing your risk tolerance, and consistently monitoring your progress. While it’s tempting to chase high returns, remember that a balanced, diversified portfolio tailored to your unique goals can provide steady growth and reduce risk over time. If you decide to take the plunge and invest, be patient, investing is a long-game. It won’t happen overnight. But you’ve taken the first step and that’s pretty exciting!

Happy investing!