How to build an investment portfolio for 2011
As 2011 approaches, many people will be thinking about New Year resolutions to make next year better than the last. Nick Raynor, investment adviser at The Share Centre, sees it as the perfect time to consider investing and gives his top tips on how to build your investment portfolio.
Investment objectives
"Generally, people look to invest for one of three reasons; to receive an income in the form of dividends; to hopefully see a growth in the value of their shares and sell them at a profit or for a combination of the both.
"Your reasons for investing may change over time. For example, you might want to raise money for a particular purchase such as a house, or for an event like a wedding.
"Equally, you may also be looking for an alternative source of income or contribute to a nest egg for your retirement. Whatever your reason for investing it's important you choose the right investments to suit your goals."
Research
"Whether you are thinking of buying or selling, it's critical to get a good understanding of the investment itself and what will affect its performance. Gut feel is not always your friend - back it up with facts.
"Find out exactly what the company does and as much about its sector as you can. While a company's annual report and balance sheet will provide you with statistics about recent performance, a good understanding of the company's position in the market will prove far more beneficial.
"Remember, the price of shares moves in accordance with supply and demand, not statistics and how a company has performed in the past is not necessarily an indication of how it will perform in the future."
Control
"It is worth giving consideration to the amount of control you want over your portfolio, depending on how confident you are about the market. There are a number of degrees of control you can exercise over investments, including discretionary management, investing via a fund manager or managing the investment yourself.
"Discretionary management means you pay a manager to invest and manage particular holdings on your behalf. Any investments made are designed to be in line with your investment objectives but the day-to-day control lies with the manager and not you.
Investing via a fund manager, means you control in which funds to invest, and the fund manager carries out your instructions. Self-management allows you to manage and control your own investments as you see fit."
Diversification
"Another way to spread risk is through diversification. Spreading your money across a range of investments is a good way to reduce your exposure to market risk. This is because you are not relying on the returns of a single investment. With a diversified portfolio, returns from better performing investments can help to offset those which aren't performing so well."
Asset allocation
"Keeping an eye on how you allocate assets within your portfolio is vital. By having a significant amount of your total portfolio allocated to different asset classes it is possible to spread risk. If one investment is underperforming for example, you could benefit from the return on another.
"A cautious investor may have a portfolio containing fixed securities such as gilts, bonds and property, for example, while a more adventurous investor is more likely to have a mixture of fixed securities, property, UK equity, emerging markets etc, allowing for a greater spread of risk."
Performance
"Don't fall into the trap of becoming too attached to certain investments. A common mistake is for investors to hold steadfastly on to shares which may have served them well in the past, but no longer represent a sound investment.
"You may find it useful to put a formal monitoring process in place by setting price limits and introducing a stop-loss system for example. Keep up to date with company and sector news and make sure to review your portfolio regularly in light of any changes in the market."
Review your portfolio
"Remembering to regularly review your investment portfolio can contribute greatly to reducing the risk of loss, especially when market conditions are turbulent. I'd suggest, no matter what the economic climate, you review your portfolio every quarter, if not more.
"Your financial goals, your attitude to risk and time horizons may well change over the course of a year and it's important your portfolio reflects your change in circumstances.
Not only will regularly reviewing your investment portfolio ensure your investments are working as best they can for you, it will also help ensure you don't get any nasty surprises when it comes to your money."
Raynor added: "To become a successful investor takes time, dedication, research and practice. If you don't feel confident investing your own money straight away, it may be worth practising first. With the Share Centre you can open a practice account free of charge and trade £15,000 of fantasy money, putting in to practice the tips above until you feel confident."