Do you keep all your eggs in the same basket?
Essentially, an investment portfolio allows you to hold your eggs in different baskets to reduce damage in the event of a crash. Through the portfolio, an investor can hold a variety of assets, including stocks, bonds, etc.
The purpose is to build a return on investment by minimising risks as much as possible through diversifying your items. Not every asset comes with the same security, or even income-generating property. For example, real estate investments are typically described as more secured as they are less likely to fluctuate dramatically. However, real estate investments are unlikely to generate big wins.
On the other hand, a high risk and highly volatile market, such as FOREX, can also drive significant gains through strategic day trading.
Therefore, building an investment portfolio must reflect your priorities and risk tolerance. If you start a portfolio to fund your retirement plan, you may prefer safer and long-term strategies that will minimise losses. But if you have high risk tolerance, such as someone who has built multiple portfolios, you can take more risks without worrying about the loss.
Most new investors have low risk tolerance. What should your investment portfolio include to minimise risks while still making money?
The pandemic has affected interest rates on most saving accounts. However, with a little research, you can still find savings accounts that let you earn up to 3.5% interest tax-free as a regular saver. First Direct and Netwest have both saving accounts offering privileged rates to their existing customers in the height of, respectively, 3.5% fixed and 3.3% variable.
For general saving accounts, some fixed-rate accounts lock cash away for a period of time but can offer up to 3% for a fixed period, such as Buckinghamshire BS with 3% for 3 years and DF Capital with 2.95% for 2 years.
ISAs remain a favourite for tax benefits and offer more freedom than some saving accounts, even though earnings are typically capped under 3% for a fixed period or under 1,5% for free access.
Stocks can be risky as they are susceptible to change values depending on market fluctuations. Companies offering to pay dividends tend to provide a safer option for stocks brokerage as they provide a sense of stability. Companies are mature and long-established.
Investors may not earn as much as they would from other stocks, but they are also less likely to incur big losses.
While it isn’t completely risk-free, dividend-paying companies are more likely to provide a regular source of income.
How much can you expect to earn? Dividend payouts are expected to represent £81.2 billion in 2022, with companies such as Royal Mail and M&G offering regular dividends per share. The top 10 highest-yielding stocks currently pay investors between 14.6p (Abrdn) and $8.84 (Rio Tinto), which means that your earnings will be determined by the number of stocks you can afford to own.
Real estate investments are among the most popular strategies for new investors because they refer to a tangible asset. Investing in real estate can be difficult due to the rising property costs.
There are options that investors can seize to reduce the financial burden and make their investment more profitable:
- Using a buy-to-let loan, which unlocks funds for the purchase, while mortgage repayments only focus on interest rates. At the end of the loan, the landlord/landlady often sells the property to pay off the remaining amount.
- Renovating an inherited property for rental purposes. While the renovation process comes at a cost, it can be more manageable than purchasing a second property.
- Investing using real estate investment trusts, which means you can buy shares rather than buying a whole property. It is more affordable, and returns provide a steady source of income.
Gilts are unique bonds that are not issued by companies but by the British government. Gilts can come in different shapes, such as investment bonds and conventional gilts.
Conventional gilts pay a fixed coupon during the year (twice), and when they mature on a fixed date in the future. You can find undated gilts with no fixed redemption date or index-linked gilts that change to reflect the Retail Price Index. The opportunity for capital growth is limited, but gilts are considered a safer alternative to corporate bonds.
Investment bonds, or income-producing investments, enable you to make a single return, but you can withdraw up to 5% of your original investment every year.
Hopefully, these few ideas can help you get started with your first investment portfolios. We strongly recommend working closely with a professional financial advisor as you set up your first-ever portfolio. They can guide you to make the best choices based on your risk tolerance, budget, and objectives.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.