How to build an investment portfolio

Where do you start when it comes to putting your hard-earned money to work for the longer term? There’s a huge range of options out there, but a few basic principles can help you make an investment portfolio to meet your financial goals.

Five tips to build an investment portfolio

1. Own a wide mix of assets

History shows that over the long term the stock market (representing shares in individual companies, also known as equities) has the biggest ups and downs but has also provided the best returns – so whatever your financial goals, having the bulk of a portfolio here makes sense if you have plenty of time to invest. However, the value of investments can fall as well as rise and investors may get back less than invested – especially over short periods.

Other assets can help provide some balance by performing differently and evening out some of the more dramatic moves.

If you are more cautious or have less time to invest, then you’ll probably want more of these ‘balancing’ assets, notably bonds which represent loans to governments or companies. These pay interest to the holder and tend to provide a lower return in the long term compared with stock market investments but can still do better than cash.

2. Broaden your investment horizons

Although different stock markets are often ‘correlated’ with one another (they tend to move up and down together) they tend to produce different returns at different times with leadership varying from month to month and year to year – as the graphic below shows.

Having a mix of geographical areas represented will help you capture as many opportunities as possible. No country has all the best companies so make sure you have some money invested in all the major areas help to cover all bases.

Ranked performance (%) of major share market investment areas over the past ten calendar years

Source: FE Analytics, data to 31/12/2023, total return basis with income reinvested. Based on Investment Association sectors: Asia ex-Japan, North America, Global Emerging Markets, Japan, Europe Ex-UK and UK All Companies.

3. Explore simple, "ready-made" investments

As with many things in life, it is possible to let perfect be the enemy of good. The challenge of trying to do the right thing can be intimidating, making it easy to give up and miss out on the long-term benefits of investing. Things don’t have to be complicated, though. As long as you have some good building blocks to begin with, simple, broad and low-cost products to get you started, then it is likely you’ll be moving in the right direction.

Keeping it simple when it comes to investing could mean a ‘tracker fund’ that aims to replicate the performance of a market by owning all or most of the companies in it. A global tracker, for instance, will cover a large proportion of all the companies in the world.

Meanwhile, ‘multi asset’ funds such as one in our own range can offer a handy way to access a professionally-managed, diverse portfolio covering lots of different areas – equities, bonds and other areas – in a single investment. Please note that investment decisions in funds and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus and understanding the risks involved.

4. Consider core and satellite strategy

Starting simple can help build confidence in investing and allow you to take some tentative steps into creating a more sophisticated investment portfolio – if you want to. One route for either novice or experienced investors is a ‘core-satellite’ strategy. This involves a central core of more mainstream investments to act as bedrock surrounded by satellites, perhaps more specialist in nature, that personalise your portfolio.

Lots of investors look for investment funds that have the best recent performance, but this can be a mistake. You might join the upward momentum for a time, but outsized performance often reverses, leaving you with an underperforming asset. Broad, passive strategies avoid this problem as they just follow the market as a whole. Alternatively, a mix of funds with different investment ‘styles’ can help.

There are thousands of funds to choose from. To narrow this down to a more manageable number, you could take a look at our Preferred List, which represents fund ideas for new investments from the main investment areas vetted by our Research Team.

Always remember to keep to the rough mix of assets you are comfortable with – more shares exposure if you are happy with taking more risk and investing for the long term, more stabilising assets such as bonds for ironing out those peaks and troughs into a smoother journey.

You could also consider investing in more specialist assets to diversify your portfolio further – things such as property (for instance through investment trusts in this area), private equity, commodities such as gold and targeted absolute return funds.

5. Don't forget tax

Even if it doesn’t seem relevant in the shorter term, tax relating to investments – income tax and capital gains tax – can become an issue. To allay any concerns, either present or future, house your investments in an Individual Savings Account (ISA) where these taxes don’t apply.

Alternatively, if you are investing for retirement, and don’t need access to your money before then, you can use a pension such as our SIPP. When you contribute to your pension, the government adds money. This is called pension tax relief and is one of the main advantages of using a pension to save for retirement. You should prioritise your workplace pension, if applicable, as your employer will make contributions on top of your own.

Not everyone is aware of the special helping hand of tax relief, but it can have a considerable impact on the size of your investment pot and the income you are paid. It usually makes pensions the most efficient way to invest for retirement.

Should you invest when the market is down?

Financial markets may get rocky, but that doesn’t mean you should stop building your investment portfolio – as long as you are in it for the long term. Big swings of volatility are to be expected from time to time, and difficult spells can turn out to be good times to put your money to work for the decades ahead.

Things can always worsen before they improve, but having a long-term mindset and adding to your investments bit by bit can help cushion market volatility. Regular buying at different points can even work to your advantage assuming prices recover. If your chosen investments have become cheaper to accumulate, it means your money buys more shares or units to keep for the long term.

Ready to start your investment journey? Sign up to our online investing platform to browse over 12,500 UK & international assets to build your portfolio.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment, please seek professional advice.

The tax treatment of pensions depends on individual circumstances and is subject to change in future. The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change.