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Five steps to build a successful investment portfolio

Paloma Kubiak
Written By:
Paloma Kubiak

Choosing funds for your ISA, pension or investment account can be time consuming and difficult. Here are five top tips to build and manage a successful investment portfolio.

1) Be clear about your overall goals

Are you primarily looking for capital growth from your investments, an income or a combination?

2) How much risk can you tolerate?

A principle of investing is that there is a relationship between risk and reward – we expect higher risk investments such as equities to return more than low risk investments such as cash. However, taking on a high level of risk does not guarantee greater returns or it wouldn’t be risky! There are many ways to measure risk but a good starting point is volatility, which is the extent to which your investments fluctuate in value.

A key factor in deciding how much risk you can tolerate is the time period you expect to remain invested. Investors with a timescale of more than 10 years can tolerate more short-term volatility, for example by investing a higher proportion of their portfolio in equities, as they have time to recover from any short-term setbacks. In contrast, an investor who can only commit to remain invested for the medium term (of up to five years minimum) should focus on less volatile investments.

3) Choose your asset allocation

Asset allocation is the process of deciding how to spread your money across different types of investments such as bonds, equities, property, cash and absolute return funds and then across different regions and investment styles. As each type of investment will perform differently at various points in time, achieving a diversified asset allocation can help reduce overall volatility, as well as expose you to a wide range of opportunities.

4) Select high quality funds

Once you have chosen an asset allocation strategy, it is important to populate it with high quality funds in each category. To help you build your own portfolio, our Top-rated Funds guide represents those funds that have been rated highly by our research team.

5) Monitor your portfolio

Investing doesn’t finish at the point you buy your funds. It is vital to continue to monitor a portfolio once invested and to periodically review it. This is because your asset allocation will drift over time and sometimes formerly strong funds can deteriorate or require reassessment, for example if a fund manager moves jobs.

Jason Hollands is managing director, business development & communications at Tilney Bestinvest