Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and the ISA and tax rules can change. Whilst we may draw attention to certain investment products, we cannot know which of them, if any, is best for your circumstances and must leave that judgement to you. If you are unsure about the suitability of any investment you should seek professional advice.]
Whilst the VT Chelsea Managed Funds might suit some investors (those with less time to research funds or those new to investing) we know that many of you like to build your own portfolio. We recognise that each investor is unique, so we don't presume to know how every one of you would like your portfolio to look.
You may wish to choose from our research tables, either the Core Selection or the wider Selection, or you may wish to choose any of the 2,500 plus funds available on the Chelsea FundStore. Either way, we thought some guidance on constructing your portfolio might be useful.
Portfolio Construction Tips
- One of the first rules of portfolio planning is to consider your current and future needs. If you currently hold an aggressive portfolio, but are considering retirement and the possible need for income in a few years, then you may wish to reduce the risk rating of your portfolio in order to consolidate the gains of previous years.
- The longer the time horizon before you need to realise your investment the riskier you can afford to be, although obviously your personal attitude to risk is of paramount importance. For instance, if you are saving to pay off a mortgage, you may wish to have a higher risk profile in the early years when your investment has 25 years to run, but in later years a lower-risk strategy would be appropriate. This allows you to lock in previous years' gains. Don't forget that an ISA investment should be considered as a medium to long-term investment. If you hold an investment for a longer time period, any risk of loss declines.
- Assessing your own risk profile is important. Whilst a higher-risk approach is generally advocated for those with greater capital (whose ISA investments represent a small part of their personal portfolio) and a longer time horizon, an ability to accept risk is important. It is no good deciding that you are in a position to take a higher-risk approach, if such action causes endless sleepless nights when markets fall! For instance, if you are comfortable with short-term losses and happy to invest for a long period of time, then you might think of yourself as ‘Aggressive’. However, if swings in valuation worry you and perhaps you are closer to retirement, you might prefer to take a ‘Cautious’ stance.
- One of the ways to reduce the volatility of your portfolio, apart from selecting funds with a lower risk rating, is to diversify your holdings. The greater the spread of funds, the more you reduce your risk. However, spreading your assets across too many funds means that those which perform strongly will have little impact on overall performance (for guidance on the number of funds to hold see below – How should my portfolio look?).
- Furthermore, balance is important, the greater the spread of sectors/asset classes the less your portfolio will be subject to swings in market sentiment. Even if you have a strong personal preference for a particular sector, it is not a good idea to plough all your money into it. It is preferable to give a greater weighting to your preferred sector, whilst maintaining a reduced weighting in other areas.
- It is important to remember to monitor your portfolio, preferably on at least an annual basis. There is a huge benefit to taking some time to analyse your portfolio to prevent sector and country biases creeping in. It is possible that occasionally some rebalancing may be required in order to maintain the equilibrium of your fund split and therefore the risk profile of your portfolio. Otherwise when a volatile fund performs well and you retain that holding, the overall risk aspect of the portfolio increases.
How should my portfolio look?
The truth is that it’s really quite subjective – everyone has a different attitude to risk and preferences for one sector/region or another. However, for those of you who would like a rough guide to a sensible split, take a look at our DIY Portfolios below:
The number of funds held within these portfolios will vary depending upon the amount invested. As a rough guide, a reasonable number of holdings would be c. 10 funds in a portfolio of over £30,000 and 15-20 in one of over £100,000. So, see how your portfolio stacks up. Remember, you can switch funds for free via the Chelsea FundStore.