How to structure your portfolio?

How to structure your portfolio?

How to structure your portfolio?

How to structure your portfolio?

The answer to that question depends on your attitude to risk. Here are three sample portfolios.

Laith Khalaf, a senior analyst at UK wealth adviser Hargreaves Lansdown suggests:

Adventurous investor

20%: JPM Emerging Markets
20%: Legal & General International Index
20%: Man GLG Japan CoreAlpha
20%: Threadneedle European Select
20%: Standard Life Global Smaller Companies


Balanced investor:

20%: Invesco Perpetual Tactical Bond
25%: Newton Global Income
10%: Stewart Investors Asia Pacific Leaders
25%: Legal & General UK Index
20%: Baillie Gifford Managed

Conservative investor:

25%: Newton Real Return
20%: Investor Perpetual Tactical Bond
10%: Legal & General Global Inflation-Linked Bond
20%: Threadneedle Equity Income
25%: Troy Trojan

How you will structure your portfolio depends on are you a defensive, middle-of-the-road or aggressive investor. This will partly determine where you invest.

The portfolio construction is the process of organizing your investments as a whole, rather than piecemeal. 

How can you have the best chance of constructing a portfolio that meets your investment objectives?

At a broader level, portfolio construction should be about structuring your portfolio in a way that stands the best chance of meeting you have stated investment aims within your acceptable level of risk.

But be careful, well thought out structuring of your assets will have an enormous impact on your long-term wealth creation. Conversely, the wrong structure could cost you in both ongoing charges or unexpected tax liability.

What factors do you have to consider in deciding on the combination of stocks, bonds and perhaps commodities to use in building up your retirement portfolio?

Let’s say that the further one is from retirement, the more risk one can take. Thus at 30, you might have a portfolio of 70% stocks, and 30% bonds. At 50, the ratio might be half stocks and half bonds and at 70, 70% bonds and 30% stocks.

Structure portfolio

This model allows for a more predictable and more stable income from bonds, but it does not take into account the characteristics of the individual or the nature of the stocks and bonds. 

Moreover, not all stocks are equal. 

If your stock portfolio at 30 or 50 is loaded with, for example, half small caps with no dividends, mining stocks with low dividends then the need for bonds is higher. 

Or if the bond portion of a portfolio is loaded with high-yield bonds subordinated debt, the fixed-income portfolio needs to be rebuilt for security. 

As we move from working years during which it is possible to raise savings and make up for investment losses into retirement, the need to cut volatility grows. A mixture of short and long government bonds and corporate bonds can’t compete with the potential of small companies’ stocks to rise. But it does have fundamental security. 

But you can implement some other model of structuring your portfolio. For example, you can buy stocks from developed and emerging markets around the world. And you can own real estate through a low-fee fund as a part of your portfolio. If you live in the USA, 

Treasury inflation-protected securities, or TIPS are a very good choice. Some of these slices of the pie will likely rise and fall and rise again at different times and at different rates. So you can rebalance at least once a year to maintain your target allocation in your portfolio.

David Swensen, chief investment officer, Yale University suggests this

How to structure your portfolio?

Fees can make terrible damage to your investment returns. 

Even in higher-risk, higher-return asset classes such as stocks you can only expect high-single-digit or low double-digit returns over long periods of time. So if you end up paying 1 percent to a financial adviser, and then 1 percent to 2 percent on top of that in mutual fund fees and then adjust for inflation (2 percent to 3 percent a year), you’re losing half of your returns or more, Swensen says. 

The odds, he says, are overwhelmingly in favor of index funds.

In his opinion, very-low-fee index funds make the most sense for individual investors. 

When it comes to investing there is no such thing as one size fits all. Your portfolio has to be well-diversified, equity-oriented for long-term investors and efficient in the sense that it is as good or better than other alternatives.

When you’re investing for long periods of time, 20 or 30 years, for example, you are likely to make more money holding a sizable portion of your portfolio in stocks or other assets with a high expected rate of return. That’s because historically, stocks offer greater returns than safer alternatives over the long term. 

But in the short term, stocks tend to be much more volatile. So as people near retirement age, many investment advisers suggest shifting more assets to the “safer than stocks” category. 

If the stock market crashes and you need to be spending money out of your portfolio as income in retirement, you don’t want to suddenly lose 20 or 30 percent of your savings and be forced to sell stocks at a low price. If you’re younger and stocks crash, you can just hang tight and wait for the market to recover.

But it’s not all about age. 

It’s also about the appetite for risk. Risk tolerance is specific to each individual. Risk-averse investors may want to hold a combination of the model portfolio and cash, which will reduce overall risk. As wealth increases, tolerance for risk may increase. As investors grow older, tolerance for risk may decrease. Each individual needs to find a portfolio that matches their risk preferences. That’s the main point.

Quiz yourself on How to structure your portfolio in the following quiz:

 

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