The word ‘portfolio’ is the shorthand term for the collection of investments you own across all your accounts – from pensions to bank deposits. Ideally, this will be spread across a variety of assets – equities, bonds, property and cash – and the mix will have been determined by your specific objectives and attitude to risk.
Ultimately, a portfolio’s success is dependent on its performance – but one investor’s idea is never the same as the next. Your needs are highly personal and your portfolio needs to reflect that. Risk is key to helping determine which asset classes you select and in what proportion. For example, cash provides security of capital and the interest it earns provides you with a regular income. However, those income payments are generally quite low and change in line with interest rates. There is also no opportunity for capital growth.
At the other end of the risk scale are equities – that is, shares in a company that allow you to participate in its growth and profits. Equities generally offer greater long-term opportunities as a successful company will increase its dividends and capital value as it increases its profits. However, unlike cash, equity prices are volatile and vulnerable to both short-term changes in market sentiment and consumer downturns. Ultimately, if things go very wrong for a company, you may end up getting back less than you originally invested – or nothing at all if that company goes bust.
Deciding how much of your portfolio goes into each asset class is known as asset allocation. Perhaps surprisingly, different asset classes tend to perform in different ways, even when the background conditions are constant – but this lack of correlation can be used to your advantage. Rather than choose just one asset for all your money and take your chances on it being the right one, you can instead put a little bit into each. In this way, at least some of your money will be performing the best it can all the time – and this diversification helps to smooth out those bits which are not performing quite so well.
Investment is a long-term decision but, given these caveats and knowing the short-term risks, a good portfolio should generate the maximum possible return for your attitude to risk. To ensure you get that risk decision right, and don’t get taken by surprise in a downturn, it’s a good idea to talk over your options with an expert.
April 2012
Important Note: Material within this article has been complied with the help of the Marketing Hub which is part of Marketing In Practice Ltd on behalf of your professional financial adviser. The contents of this document do not constitute advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term. Before taking any decisions, we suggest you seek advice from a chartered financial planner.