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How to Create Your First Investment Portfolio

New rules will make it easier than ever to start investing in companies, but creating your first portfolio can be a little overwhelming

Rosie Murray-West 25 April, 2014 | 12:44AM

George Osborne's changes to the rules surrounding ISAs in the last Budget make it more attractive than ever to start investing in companies, rather than simply tucking all of your money away in a savings account.

The Chancellor stunned experts by increasing the amount that can be saved into an ISA, or Individual Savings Account, to £15,000 a year from July 2014. These ISAs give you an exemption from capital gains tax on any profits you make on your investments.

What is more, you can now move your ISA nest egg from cash to shares and then back again, if you like, which means that you can reduce the risk profile of your savings at any time.

If you are new to investment, though, creating a portfolio within your ISA can be tricky. With so many stocks and funds to choose from, it can be daunting to pick the best products for you. Here are some tips to help you to create a balanced portfolio that will meet your goals and allow you to sleep at night.

Consider Your Own Risk Appetite and Goals

Not everyone loves a rollercoaster ride. Some funds and shares are more volatile than others, although these often give the potential for greater reward. Looking at the past performance of funds or shares is one way to gauge volatility, while fund factsheets and independent research from Morningstar will give you a steer on how much risk each fund takes, among other things.

You need to look at your time horizon: you can afford to take more risk if you don’t need the money in the next few years. If you’re saving to fund your retirement and don’t plan to retire for 30 years, you can afford a few bumps along the way.  But if you plan to withdraw your savings, say, for a house deposit or new car you’ll want to minimise the risk of losing any money in the short term.

Understand the Behaviour of Different Asset Classes

It is easier than ever to get exposure to assets that were formerly only available to professional investors. In order to ensure that your portfolio performs well throughout the economic cycle, building up investment in all of these different classes is advisable. For example, commodity prices can be extremely volatile, but often rise as equities fall, meaning that having both in your portfolio will give it a smoother ride.  A financial adviser will typically create portfolios with exposure to equities, government and corporate debt, currencies and commodities – as well as ensuring that you have enough money in cash. If you are managing your own portfolio you need to do the same thing.

Study Template Portfolios

Everyone’s risk appetite and goals are different, and the composition of your portfolio should reflect yours. Most investment platforms will give you suggestions for a portfolio reflecting different levels of risk and goals, which could help to inform your asset allocation.

For example, Hargreaves Lansdown's Master Portfolio for core investors suggests putting 20% of your assets into two bond funds, which are generally less volatile than equities. In its Adventurous portfolio, just 10% goes into bond funds, while emerging markets take a larger share of the investment allocation.

Diversify, Diversify, Diversify

As well as ensuring that your portfolio contains a balance of different asset classes, make sure that it is also diversified within those classes. Pooled funds, such as OEICS (open-ended investment companies) and unit trusts are a good way to do this as your money is spread around a larger number of investments. Look at how your portfolio is allocated geographically as well as in different corporate sectors. Some funds are narrowly focused on one geographical area while others have a mandate to spread their funds more widely.

Target-date funds—a relatively new product in the UK but well-worn in the US—can also be a useful yardstick for getting an idea of a suitable asset allocation. Fidelity Target 2030, for example, is geared towards an investor who plans to withdraw much of their assets in the year 2030, i.e. someone who might retire in 16 years’ time. The latest portfolio data show 95% of the fund’s assets are in equities, with 28% of that in UK stocks, 22% in US stocks, 13% in Eurozone stocks and the rest spread across Asia, emerging markets, the Middle East and Africa. These assets are also spread relatively equally between giant-, large- and mid-cap stocks, plus 5% in small-caps.

Review Often…But Not Too Often

Finally, once you’ve created your portfolio, don’t leave it to stagnate. Some assets will perform more strongly than others at certain times, leaving your portfolio unbalanced. Ensure that you review it every few months to check that it still fulfils its purpose of balancing risk and reward. Remember that investing for the long-term means trying your best to tune out the market noise; too often headlines can trick us into making badly-timed, or emotional, decisions that may prove to be detrimental in the long term.

Morningstar.co.uk managing editor Holly Cook contributed to this article.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Rosie Murray-West

Rosie Murray-West  is a financial journalist writing for Morningstar.co.uk