How to build a portfolio of funds

Written by The Big Exchange on 25th Oct 2023

This article is from the latest Good Investment Review, which you can download free here.

Here are four questions to ask yourself when putting together a portfolio of investment funds, from the experts at positive impact investing platform The Big Exchange.

1. Where am I starting from?

It’s always a good time to review your existing investments and check if these are still aligned with your goals. It’s also worth considering whether you are making use of any tax wrappers available, such as ISAs and pensions.

2. How much risk should I take?

Investment risk is usually measured in terms of volatility. Higher volatility means potential for greater losses alongside the potential for stronger gains. The first thing to consider when it comes to your personal risk profile is ‘capacity for risk’ which depends on your income and other financial resources – this is likely to change as your personal circumstances change.

The second is your personal attitude to risk which will affect your investment choices – there is no point in investing in areas of higher volatility if it means you lose sleep at night.

In general, the younger you are, the more risk you can take – time is on your side.

If investing in a JISA for a child, they usually have a long-time horizon (18+ years). So, as a consequence, it may be worth considering asset classes such as emerging markets, or smaller companies, which tend to have potential for higher growth (but also higher potential for loss too).

Alternatively, if you are already retired and hoping to generate some extra income, you might prefer a bond or multi-asset fund. Be mindful that inflation can affect any returns – including cash! High inflation is behind the cost-of-living crisis that is squeezing household budgets. To maintain our living standards, we need to see a ‘real return’ on our savings and investments. But, if your savings earn 4 per cent per annum and inflation is 10 per cent per annum, that means your real return, after deducting inflation, is negative.

Investors often find it hard to look past short-term performance; seeing investments losing value is unsettling even for the most experienced investors. However, while we know that company shares rise and fall, and whilst past performance is not a reliable indicator of future results, history suggests that over the long-term, markets trend upwards. The general rule of thumb is to stay invested for as long as is suitable for your circumstances – both to try to tackle inflation and to ensure your investments have as long as possible to try and make back any losses.

Although holding too much cash can risk your capital being eaten away by inflation, do remember to keep an emergency reserve for unexpected events; between three and six months of outgoings is typically suggested.

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3. Where should I invest?

A lot of investors have a bias to their home market, perhaps because they recognise well-known brands held by UK funds, which somehow feels reassuring. However, although many UK companies do business around the world, our stock market is dominated by ‘old economy’ sectors, such as miners, oil, banks, and tobacco, which are not everyone’s cup of tea.

So, what opportunities could you be missing out on by focusing on the UK? Experts suggest a well-diversified portfolio, across a range of geographies and asset classes, gives the opportunity to seek out the best each region has to offer. This should help to smooth returns, as not all markets rise and fall at the same time.

4. A world of opportunity

There is a tendency to assume that investing overseas is riskier. Certainly, exposure to different currencies can add extra volatility. Some Emerging Market countries have lower standards of corporate governance, and their stock markets may be less well regulated. However, as is always the case, there will be winners and losers.

The Big Exchange

Our customers choose The Big Exchange because they want their investments to have a positive impact on the planet and society for future generations. All of our 65+ funds have undergone a thorough impact assessment and have been awarded a medal rating relating to the positive solutions they deliver, the transparency provided, and the fund’s influence on the underlying companies in which it invests. The Big Exchange is a Good With Money ‘Good Egg’ company.

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