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10 easy steps for making an investment portfolio

Here’s how to create an investment portfolio based on your own risk tolerance, objectives, and time till retirement. The 10 steps guide you through what you need to know and to take personal control of your investments. Learn which asset allocation is right for you, and how to get started.

What is an investment portfolio?

A personal investment portfolio is an assortment of assets that could include stocks, exchange traded funds (ETFs), bonds, and potentially some other assets.

An investment portfolio is created based on an investor’s risk tolerance and goals. If an investor is risk adverse, or risky happy to take a risk, this is reflected in assets they hold in the portfolio. Portfolio diversification​​ is the cornerstone of investing. With diversification, if one single investment performs poorly, it has minimal impact on the overall value of the portfolio.

What are the benefits of an investment portfolio?

There are a number of benefits to having an investment portfolio:

  • Potential for long-term growth, helping to achieve financial goals or retirement goals.

  • Potential to outpace inflation so savings don’t lose buying power over time.

  • Personalised risk/reward profile​​ based on individual risk tolerance and objectives.

  • A portfolio provides diversification and exposure to multiple assets and stocks, not just a few. Diversification can help to decrease volatility.

Steps for making an investment portfolio

1. Understand your risk tolerance

Risk tolerance is the level of risk you are comfortable with, and how you are likely to react to risk/volatility.

More volatile assets tend to produce higher returns, but aren’t ideal for someone who doesn’t like seeing their portfolio fluctuate wildly. Ideally, you may want enough risk to get the highest returns possible, while also keeping volatility low enough that you can feel at peace with the movements (up and down) that occur. If you can’t sleep because of your investments, they may be too risky for your personal tolerance.

Consider what your risk tolerance is. Do you prefer a more stable portfolio, possibly sacrificing a higher return? Or are you willing to see bigger swings in your portfolio in exchange for higher returns? Knowing this will help you to decide what investments to make later in the process.

2. Decide how much you want to invest

Consider how much money you can invest. Only invest as much as you can afford not to touch. The capital should be allowed to grow, instead of acting like a piggy bank with constant or occasional withdrawals.

If you are just starting out, deposit what you can afford. Build up the funds in the investment account with regular (or even irregular) deposits, then start making purchases based on the steps that follow.

3. Outline some investment goals

Highlight some realistic investment goals or investment objectives based on your risk tolerance. Passive investment strategies in the stock market have typically returned 7% to 10% per year on average. Government bonds have returned 5% to 6% per year over the long run.

Consider basing the investment goals on the past performance of these asset classes. A portfolio of half stocks and half bonds could return approximately 7%. Please note that past performance is not a reliable indicator of future performance. Returns vary, but it is good estimate for creating goals.

4. Managed versus DIY portfolio

Next, you can decide whether you want someone else to manage your money for you, or if you want to do itself. A financial adviser can create a portfolio, and manage it, for a yearly fee. The fee is typically at least 1% of amount invested and is typically more.

A do-it-yourself approach is the other option. Create the portfolio yourself, saving the advisory fees. Mange the portfolio yourself based on the steps outlined here. There are still commission fees, and possibly ETF expense ratio fees, but these are typically much lower than paying a fund manager to oversee the portfolio.

5. Chose an asset allocation that reflects your risk tolerance

Asset allocation​​ is the percentage of the portfolio that is put into each asset class. There are only a few asset classes in most portfolios:

  • Stocks historically offer a higher risk and return than bonds.

  • Bonds or fixed income assets historically offer lower risk and lower returns than stocks.

  • Precious metals and commodities tend to have more erratic returns and risk, but don’t always move in the same direction as stocks and/or bonds. Therefore, they provide diversification.

  • Cash and cash equivalents are very low risk but have the lowest returns. These are government savings bonds, certificates of deposit, and the like.

The composition of the portfolio is based on how much risk an investor wants. Here are some examples.

A 100% stock portfolio is the riskiest and will experience larger price swings but is also likely to provide higher returns.

70% stocks, 20% bonds, 5% commodities, 5% cash equivalents is an aggressive portfolio. Returns may be slightly lower than the riskiest portfolio but risk and volatility will also be lower.

40% stocks, 40% bonds, 10% commodities, and 10% cash equivalents is a more balanced or moderate portfolio.

30% stocks, 55% bonds, 5% commodities, and 10% cash equivalents is more conservative. The higher concentration in bonds means lower volatility but likely lower returns than higher risk portfolios.

70% bonds, 20% stocks, 0% commodities, and 10% cash equivalents is a very conservative portfolio. It is highly focuses on lower volatility and lower return assets.

These are just examples and can be adjusted as desired.

The investor’s age is one of the main determinants in deciding on a portfolio allocation, along with risk tolerance and goals. As investors mature, nearing retirement and even into retirement, they typically don’t want to lose what they have right when they need it. Therefore, they tend to gravitate toward more conservative portfolios.

Younger people may decide to take on more risk, since they won’t be needing the funds for a long time. As they get older, the portfolio may become moderate, and then eventually conservative.

6. Pick the individual assets for each allocation

Within each asset class there are riskier and safer options.

  • High-grade bonds (A rating or higher) and low volatility blue-chip stocks​​ and ETFs are examples of lower risk assets.

  • Small-cap stocks​, start-up companies, technology stocks, and lower-grade bonds (BBB or lower) are examples of riskier more volatile assets that may produce higher returns.

  • Investors may also partition the stock section of their portfolio based on value or growth investing. Value investing​​ is the process of finding stocks that are trading at cheap prices relative to their intrinsic value. Growth investing cares more about buying companies that are growing, even though they may look expensive based on current intrinsic value. Some investors put all their stock capital into one approach, or they may allocate part of the stock capital to each, and possibly other strategies or stocks as discussed above.

ETFs are available for stocks, bonds, and commodities. They are composed of different assets, usually aligned to a theme, such as all being small companies, or large companies, all in the same sector, or all being low volatility. Multiple ETFs can be used to create a diversified portfolio.

7. Invest in your chosen assets

Once you have selected your investments, it’s time to buy them. You’ll need an investing account, such as an ISA, SIPP, or general trading account. You can choose between market or limit orders to place your trade.

8. Monitor your portfolio

How much you wish to monitor your portfolio is up to you, although it doesn’t need to be checked too frequently. When doing this, you can check the gain or loss on each of your current positions.

9. Invest regularly, and automate if possible

Automating deposits is an efficient way to build up the portfolio. As funds go into the account, buy assets in the proper allocations. Since there may be commissions on each trade, you could minimise these by letting capital accumulate and then making one bigger purchase instead of lots of small ones.

Regular contributions over time allow the investments to compound, as well as buying at an average/fair price over time.

To further automate, re-invest dividends received automatically if possible. This can be set up through a broker, but only certain ETFs and stocks provide this function.

10. Rebalance when needed

Rebalancing​​ is bringing a portfolio back to its desired asset allocation. This is typically done once a year. For example, the desired portfolio may have 40% in the stock market, but at the end of the year, stocks now account for 50% of the portfolio. Some stocks need to be sold and invested in the other assets to bring the portfolio back to the desired allocations.

FAQs

DIY portfolio vs managed portfolio: which is better?

With a managed portfolio, you tell your manager what you want and they do the rest. You’ll pay a fee for this service, which is sometimes substantial. On the other hand, once you’ve decided on a portfolio, buy the assets in the desired allocation, rebalance once per year, and likely save yourself lots of individual purchase fees. Learn more about rebalancing your portfolio manually.

Are there prebuilt portfolios that I can invest in?

Yes, there are ETFs — typically with names that include “portfolio” or “allocation”—that are a complete portfolio. Each will have a different focus. There are all-stock portfolios, stocks and bonds portfolios, and others, which include real estate (REITs), precious metals, and other assets. Read more about exchange-traded funds.

Can I copy famous investors’ portfolios?

Large hedge funds and money managers must file a 13F form in the US, which discloses their long positions. These forms are filed quarterly, so they may be out of date by the time the data is available to investors. They may have sold their position the next day, for example, which investors won’t know till the next quarter. For example, the AlphaClone Alternative Alpha ETF (ALFA) in the US tracks stocks with high hedge interest. Since 2012, it has had similar performance to the S&P 500.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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