How you can build an investment portfolio

Published by Rob Griffin on 11 September 2012.
Last updated on 06 March 2017

When it comes to building an investment portfolio there are a few golden rules: know what you want to achieve; research thoroughly before committing any money; and avoid the temptation to risk every penny on just one area of the market.

If the past few years have taught us anything it's that there are no guarantees of investment success, so ensuring you have a diversified spread of assets is essential to reduce your overall level of risk. A well constructed portfolio should be diversified in a variety of ways, including overall investment style, number of individual asset classes, spread of geographical allocation and the approach of the fund manager.

Step one: Understand risk

Most portfolios will include equities, cash and fixed interest investments, such as corporate bonds and gilts, but how you divvy up your money between these asset classes will depend on your financial goals and willingness to accept losses. So the first step is to ascertain if you are a low, medium or high-risk investor.

Lower-risk investors prefer to put their money into safer investments, favouring cash and fixed-interest because they are more concerned about losing their money than making huge returns. This approach is often favoured by people who don't have time to recoup big losses, perhaps those in, or approaching retirement.

Medium-risk investors accept more risks must be taken to generate better returns and are happier to invest more in equities. However, they would not feel comfortable ploughing all their money into stocks and shares. This approach is sensible for those who can ride out the high and lows of stockmarket investing.

Higher-risk investors will include some more speculative investments in their portfolio, such as emerging markets or smaller companies, in the hope of generating stellar returns. This is only suited to those investors who can afford to ride out big losses.

Step two: Know your type

Your long-term goals will determine your investment style. If you're looking for regular returns in the form of dividends, for example, you want to boost your income in retirement, investing for income makes sense.

If you have years to save, investing for growth might be more suitable as you will focus on companies whose profits and share prices are likely to dramatically outperform the stockmarket over the next few years. As part of a diversified approach, it's advisable to have a mix of both strategies within your overall portfolio.

If you're more cautious, a higher weighting in incomegenerating funds would be sensible, whereas the gung ho would have more in growth-focused funds.

Step three: Diversify

Wealthy or hobbyist investors may choose to buy individual corporate bonds or shares but it usually makes most sense to invest in collective investment funds, where money from numerous investors is pooled and invested by a professional fund manager. Investors in these funds benefit not only from increased diversification but also economies of scale, effectively reducing both the trading costs and potential risks.

Pooled investments, like open-ended investment companies (OEICs) and investment trusts, can invest in a variety of asset classes, but the four main ones are equities, bonds, property and cash.

Whatever type of investor you are, diversification is key. Different asset classes won't generally rise and fall at the same time so having a broad spread means you are building an element of protection into your portfolio to safeguard you against tougher environments.

For example, if you're getting little return from corporate bonds, you would hope the equities you'd chosen would be rising in value. When commodities are doing well, property may be struggling. It's all about striking a balance between asset classes so that one is always on the up.

Step four: Choose your funds

Once your asset allocation is decided it's time to choose your funds. It might be tempting as a UK-based investor to concentrate all your efforts on funds investing in what are perceived to be UK companies but this might not be sensible. In fact, given the current climate, you may well be advised to include some international exposure.

Although funds investing in regions such as Latin America and Asia have done well in recent years they are higher risk and it may be more sensible to pick a fund that invests across the globe. Managers here will give you some exposure to those economies but won't bet your shirt on them. You also need to be confident your chosen fund manager can make you decent returns, but finding one that can perform consistently well can be a challenge.

A good performance track record is no guarantee of future success but looking at performance over several time frames such as three, five and seven years can show how they have performed in different market conditions. Try to seek out funds that are consistently top-quartile, meaning they are always in the top 25% when compared with other funds in their sector.

You should also find out about the fund manager's objectives and investment approaches, and see if you can find out key information such as whether they invest their own money in the fund. Those that do, of course, have a vested interest in its success.

Much of this information is available from fund supermarkets such as Interactive Investor and Funds Network. You can use fund search tools to find ones to suit your criteria, compare past performance and get the lowdown on individual funds by downloading fund fact sheets.

Step five: Monitor your decisions

The process of building a portfolio mustn't end when you’ve invested your cash. To get the best from your investments you need to regularly review them, so read monthly updates from managers and do a proper review every six months.

You shouldn't automatically ditch fund managers as soon as returns fall but it's useful to see if they have a justifiable reason for periods of poor performance. If a fund consistently underperforms its peers you may decide to switch.

The alternative method of portfolio construction

Finally, for investors that want a diversified exposure to a variety of fund managers and regions of the world, but are unwilling or lack confidence to do it themselves, an alternative option is investing in a multi-manager fund.

Here, fund managers buy into other funds rather than individual companies in the hope that getting access to a wider range of fund management talent will result in better returns, increased diversification and lower risk.

However, there is a price to pay. In the vast majority of cases these funds will cost substantially more than ordinary funds because you have to pay fees, not just to the manager running the fund but all the managers running its holdings. The fund would need to out perform strongly to justify this decision.

Golden rules of portfolio building


  • Consider your objectives. Savings are for the short term, investing is for the long term.
  • Accept that the value of your investments will rise and fall.
  • Remember risk and return are closely linked.
  • Ensure your investments reflect your goals and attitude to risk.
  • Review your portfolio every six months.


  • Be too cautious. Accepting a degree of volatility is key to generating long-term returns.
  • Be distracted by noise. It's impossible to judge short-term market movements but don't let this put you off.
  • Chase performance. Most investors go for the flavour of the month but look at funds with the potential for steady growth year after year.
  • Pull out if the going gets tough. Selling after a downturn is a sure way to lose money.

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