This article is from the Good Guide to First-Time Investing 2025, available to download free here.
So you’ve decided you want to invest rather than keep all your money in cash. Before you get started, there are some key questions you need to ask yourself. The answers to these will ensure you build an investment portfolio that is in line with your financial goals.
They include:
• What are your investment objectives – do you want to generate a regular income or grow your overall pot over time?
• Do you want to be able to make a big purchase such as a house or car, pay recurring school fees or fund your retirement?
• What is your time horizon to achieve your objectives?
• How much risk are you prepared to take? For example, how much loss are you willing to accept over the short term, remembering that typically the more risk you take then the greater potential returns over the long run?
• Do you want to invest directly in companies or put your money into funds run by professional investment managers?
You should now have a general idea of where and how you want to invest. Beyond this, you might also have preferences for the types of investments or companies you want your money to go to and/or those you want to avoid.
Investing sustainably
For example, do you want to invest your money sustainably? At Liontrust, we define sustainable development as meeting the needs of the present without compromising the ability of future generations to meet their own needs.
Investing sustainably can mean excluding certain types of stocks (such as oil or tobacco companies), identifying sustainable themes (such as those focused on making the world cleaner, healthier and safer), and/or engaging with companies to influence management into making positive changes.
The golden rules of investing
However you choose to invest, there are some fundamental rules of investing that remain the same. If you opt for an investment fund that is ‘actively managed’, such as those offered by Liontrust, then an experienced fund manager will follow these guidelines for you. However, it’s a wise idea to have a basic understanding of them yourself.
First is the power of diversification. This is known as the investors’ secret weapon. Put simply, it means ‘don’t put all your eggs in one basket.’
Think about the FTSE 100 index, which consists of the 100 largest companies on the London stock market. Imagine you choose one of these companies and decide to invest all your money in its shares. Your success depends on the fortunes of just this one business.
Now imagine that you split your money into 100 equal parts and spread it among all the companies. Some will do well and others not, but overall, you stand a very good chance, if history is any guide, of growing your money over time.
Diversification is enhanced if you invest in smaller stocks as well as those in the FTSE 100, and therefore spread your investments more widely across sectors, and by investing internationally.
Taking this even further, you can invest in other asset classes – such as bonds, commodities and property.
Next is the art of blending portfolios. This might include combining investments in actively managed funds with passive vehicles and across different styles of investing (like finding companies that investors believe are undervalued, those that investors believe will grow faster than the average or those companies which have been performing well recently).
Diversification and blending should smooth the ups and downs that are inevitable in investment markets, which is known as volatility. Over time, events will have large impacts on financial markets, which in the past have included the financial crisis in 2008 and the Covid pandemic in 2020.
However, while you will experience such market dips from time to time, throughout history markets have recovered and such falls look ever smaller on a chart the longer you are invested.
It has proven successful to stay invested through these events rather than try to time when to buy and sell on dips and peaks. An investment of £10,000 into the FTSE All Share index in January 1986, for example, would have been worth £277,516 in July 2024 if held consistently over this period. But if you had missed the best 10 days of returns for the index, your investment would only be worth £141,697 *. Time in the market generally is a more successful philosophy than timing the market.
Actively rebalancing your portfolio to bring it back to the original proportions you put into each investment – known as the asset allocation – can be beneficial because it aligns with your objectives, risk profile and time horizon. It also means you are selling investments that have become more expensive and buying those that have become cheaper, which can enhance returns over time.
In deciding how to manage an investment portfolio, you can benefit by focusing on what is appropriate to you: what will enable you to achieve your financial objectives using a suitable level of risk and with an approach that meets your values.
