Create a winning investment portfolio

Last updated on 13th December, 2017 at 10:06 am

Just like running a marathon, creating a successful investment portfolio requires planning, pacing and a commitment to the long haul.

The stark reality is that well over 90% of people who reach retirement age either depend on family members or friends to support them financially, or have to keep on working to earn a living. This should prompt us all to start investing as much money as possible, from as early in our careers as possible. Investing in a well-thought-through investment portfolio will make your investment work as hard as you do.

What’s in the basket?

An investment portfolio can be described as a basket of different investment types all held simultaneously. You also need to know the main types of investment groupings, known as asset classes, available to investors. This usually includes cash (savings accounts), shares (in companies), bonds (lending money to the big institutions and government) and property. These asset classes can be further broken down into sub-classes by size and industry etc, offering investors a broad range of investment options, but which also have different potential returns and risks.

The right advice

Stepping into the world of investment for the first time can be bewildering, so it is advisable that you consult a qualified financial adviser who will help you to create an investment portfolio aimed at meeting your specific investment goals and needs. An adviser will also be able to help you figure out how many of each type of investment you should include. Your personal circumstances and your investment goals would typically determine what types of investments to include in your portfolio in order to meet your future needs for capital, and give you peace of mind. Important factors to consider are your age, your short-, medium- and long-term financial goals, how much time you have to grow your investments, your household budget and the amount of money left to invest, as well as financial risks, such as retrenchment, bankruptcy, disease, disability, etc.

Think about risk

People choose a particular type of investment because of their risk profile, in other words how they see and handle risk. Risk is a calculated chance you take that may lose a part of or even all your money. Your age and stage of life, as well as your financial position, will influence the risk you are willing to take as an investor.

Investment strategies

Younger people tend to be more risk tolerant and normally have a longer time span to invest (investment horizon), therefore they tend to aim at the highest possible returns. However, if you are risk averse (afraid of risk) and choose an investment portfolio where there is limited risk, your real return is likely to be negligible or even negative. Between the two is the balanced investment portfolio, which is exactly what it says: asset allocations are balanced and designed to generate a steady combination of growth, income and capital preservation, reducing the impact of market fluctuations because the holdings may or may not mitigate each other to some degree. However, some of these portfolios can also be poorly constructed, which means that you need to be careful in your choice of brand, portfolio manager and product.

Diversify

A golden investment rule is to optimally spread (diversify) your investments across asset classes and over sectors within asset classes to reduce your risk of losing money in times of market volatility and fluctuation. On the other hand, a well-diversified investment portfolio may also increase your potential for better returns.

Revisit

Once you have an established portfolio, you need to analyse and occasionally rebalance it because market movements may cause your initial weightings to change. The asset weighting of a type of asset in a portfolio represents its percentage weighting of the total portfolio. Other factors that are likely to change over time are your current financial situation, your future needs and risk tolerance. If these things change, you may need to adjust your portfolio accordingly. This does not mean that you should unnecessarily ‘churn’ (change) your portfolio to chase investment returns. Sound investment is a marathon that requires good planning, an understanding of your destination and pacing yourself accordingly. By Wilma de Bruin Find out more about Sanlam’s investment options – click here.