How to build your perfect portfolio
The one key thing you need to know about your ISA is the deadline. If you don’t use your allowance by 5 April, you lose it.
You can put up to £20,000 in an ISA in the current tax year. If you can afford to do that every year you can work out how much your tax-free fund will be worth after five or 10 years.
With a decent return that nest-egg should grow even more, which means it’s not surprising that there are some ISA millionaires out there.
Even with as little as 5 per cent investment returns, your ISA could grow to be worth a million in less than 30 years. That’s tempting, isn’t it!
But don’t get ahead of yourself. Chasing returns is not the way to build the perfect ISA portfolio.
Instead, you need to think about why you are saving and what for. You may want to build up a nest-egg for retirement, or save for university costs, for instance.
Individual shares can be the most risky, but offer the most potential. Funds help spread the risk.
Once you have a plan, you can set a target. Do you want to build up a £10,000 nest egg? One that’s worth £100,000? Or maybe you’re shooting to build up that £1m pot?
Deciding on your plan and how quickly you want to get to your total will help you choose how to invest.
If you want to make a lot of money quickly then you’ll have to be prepared to take some risks. The higher the risk means the greater chance of your ISA shrinking.
There are different levels of risk. In a perfect ISA portfolio, you’d spread risk by including some fairly safe investments, some slightly more risky ones and, depending on how long you have, even some relatively high-risk opportunities.
Individual shares can be the most risky, but offer the most potential. Funds, which hold a number of different shares or even invest in different funds, help spread the risk so that if one share tanks, the fund will remain in the black through its other holdings.
If you’re saving now for retirement which is only five years away, then you should cut the risk down. But if retirement is, say 35 years away, you can afford to take more risks.
If investments do disappoint, you have time to take action to rebuild a portfolio. In fact, you have decades.
In a perfect ISA portfolio you might have a third in each of the three different risk factors: relatively safe, medium risk, and high risk. But that will change as your investment period shrinks.
If you have just five years to go, you will probably want the majority of your portfolio in a safer environment.
How do you choose investments to fit the different risk profiles?
For lower-risk opportunities investors normally consider bonds or cash.
There is plenty of really helpful research freely available to educate you about different funds, shares, bonds, or whatever else you are thinking about investing in.
You need to do your own work to find the right investments, but crucially you need to keep on top of them and change things when you need to or feel there’s a new opportunity.
In short, keep interested in the progress of your portfolio and keep working at improving it. And whilst it can be said there is no such thing as perfect, you probably know what is perfect for you, depending on your needs and circumstances.
One of the best ways to reach your investment goals is through Regular Investment. If you 'drip feed' into the markets you will average out the highs and lows of the stock market throughout the year, for smoother returns.
As a reminder, here’s a quick five point plan:
- Decide what you’re saving for.
- Decide how long you’re saving for.
- Set a target total.
- Research different investments and risk factors.
- Once investments are chosen, keep monitoring performance and change if necessary.