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How to pick investments for a portfolio

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

There are over 4,000 funds for investors to pick from in the UK. These encompass a wide range of sectors (e.g. technology, energy), markets (e.g. Europe, Japan) and asset types (stocks and bonds). Which ones are best to pick for your portfolio? How do you begin to sift down to a set of suitable candidates, and how many do you need?

In this article, our financial planners here at Castlegate in Grantham, Lincolnshire offer some thoughts to help you. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:

01476 855 585

Establish goals & risk tolerance

When will you eventually need the money you’re planning to invest? If you need it within the next 5 years (e.g. for a house deposit), then you may need to be more cautious with the funds you choose. After all, if a market crash occurs in that time, then you may not have time for your investments to recover.

As such, you may wish to concentrate more on “safer” assets (e.g. bonds), and focus more on stocks with a history of price stability and high dividend payments. Certain funds will offer these and you can build your portfolio accordingly.

This leads us to goals. What do you want to achieve with your investments? In general, there are two broad goals – capital growth and income. The former typically involves taking more risk over a longer period (e.g. 10+ years) to grow the value of your shares over time. This is often a good option for investors early in their careers who wish to build a retirement fund over a 30+ year period. However, the income goal is typically more attractive to people nearing retirement. At this point, you have largely accumulated your wealth and wish for it to remain largely stable in value – providing you a sustainable income after your career is finished.

Again, different funds are built to cater to these different goals and priorities.

Amidst all of this is your risk tolerance. It is important to be honest with yourself about how much short-term volatility you can cope with. A helpful question to ask is: “How would I feel if the value of my portfolio fell 25% tomorrow?” If you know you would be able to stay invested – e.g. to gain overall growth in the long term – then it may be appropriate to include more “higher risk; higher reward” funds in your portfolio. If, however, you know that you’d face a strong temptation to sell your investments, then you will likely benefit by focusing on funds which pose less risk – but also lower potential returns.

Fees, choice & platforms

In today’s digital world, you’ll likely pick your funds using an online investment platform. This will automatically narrow down your choices, as each features around 70 funds and will concentrate on certain fund providers – excluding others. Vanguard, for instance, only offers their own funds to retail investors whilst others, like Fidelity, offer a range of providers.

The latter will, of course, offer you more choice – albeit usually at a higher cost (e.g. due to more admin costs for the platform). Unlike cash in a cash savings account, investing in funds involves paying various fees (e.g. fund management fees and platform fees) which eat into your returns. It is a good idea to compare these costs when researching different fund options. As a general rule, you’ll likely want to narrow down to cheaper funds unless a more expensive one demonstrates higher performance.

Active, passive & fundamentals

Another factor that can affect costs is the structure of the fund. Broadly, there are two types of fund – active and passive (or “tracker”/”index”). The former are typically more costly because the fund employs a professional team and fund manager to select investments for the fund, buying and selling on behalf of their investors. They typically justify the cost by claiming to outperform the wider market. Passive funds, however, track an index like the FTSE 100. This requires far lower overheads and so are typically cheaper.

Here, your investment philosophy is important when picking funds. Many people stand firmly by the value of active funds, and so are happy to include them in their portfolio. Others believe that most active fund managers do not beat their benchmarks, and so it is better to invest in passive funds (unless, say, you wish to invest in a sector with lower choice – e.g. ESG). Regardless, you should also take time to consider the fundamentals of each fund on your list – i.e., how it is put together, and whether it is exposed to too much needless risk.

For instance, one of the reasons the popular Woodford Equity Income fund failed is because it included too many “illiquid” investments (i.e. difficult to sell quickly). When investors came in their droves to take out their money (due to falling performance), the fund quickly collapsed as not enough investments could be sold quickly enough to meet demand.

Conclusion & invitation

These are by no means all of the considerations involved with picking funds for a portfolio. Yet we hope this content helps you form your own thoughts as you discuss with a financial adviser.

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585