Learning how to structure a portfolio is important, because:
- A well-structured portfolio can give you a better chance of long-term success.
- You can build a portfolio that suits your time, diversification, and risk management needs.
- It can help you feel confident about your long-term plans, and stay the course.
What is an investment portfolio?
You can think of an investment portfolio as all the money you’ve ‘given the job’ of making you more money. This can include any investments you may have made in stocks, ETFs, managed funds, real estate, bonds, and even cash.
When you’re building an investment portfolio, your aim is to pick the investments that give you the best chance of meeting your goals, while managing the risk and volatility that comes with every investment.
Because so many different investments can make up your portfolio, it can be confusing to know how to structure it to give you the best chance of success. Here are some things to keep in mind.
What goes into an investment portfolio?
Asset classes
Asset classes are different groups of investments that are grouped by their features, which can include investment type, how risky they are, and what their expected return is.
By building a portfolio that features a range of different asset classes, you’re more likely to be diversified which is broadly recommended for long-term investing success.
Common asset classes include:
Equities (stocks/shares) – These are when you buy a portion of a company to ideally make money from its long-term growth.
Bonds – This is when you lend your money to a company, municipality, or government. They pay you back the money you lent them, plus interest, over time.
Cash – These are your standard savings, term deposit, and money market accounts.
Real estate – Real estate includes investment properties, any shares in a Real Estate Investment Trust (REIT) you might buy, and some people count their primary place of residence (PPOR).
Commodities – Raw materials that are used to make physical goods are known as commodities. You generally buy exposure to them through investment types such as ETFs, managed funds, or industry companies.
Alternative investments – These include things like hedge funds, art, watches, antiques – basically anything that doesn’t fit into the other classes.
Each asset type has a different expected level of risk, return, and volatility.
Risk
When you’re building your investment portfolio, you’ll need to consider both your own risk tolerance and the risk profile of your investments.
One way you can think of your own risk tolerance is to consider how much volatility you can stand before you freak out and want to sell all your investments.
It’s different for everyone and sometimes it’s something you only learn by experiencing it for yourself.
This is why some people recommend diversification and having a range of different assets – because a balance of different investments with different risk profiles may help you to deliver steadier returns over time.
Each asset class has a generally accepted element of risk. Here’s how MoneySmart sums up the risk profiles of each asset class.
| Asset class | Risk profile (risk of losing money) |
|---|---|
| Cash | Very low |
| Fixed interest | Low |
| Property | Medium to high |
| Shares | High |
| Alternative investments | High |
Source: MoneySmart
Asset selection
Asset selection is when you pick different investments from the classes and risk profiles you’ve identified as being attractive to you.
When it comes to selecting assets, you’ll want to make sure to thoroughly research the investment itself, to make sure it fits in with your time, risk, and diversification needs.
This can get pretty tricky, so if you’re unsure, you could consider consulting with a financial professional for independent financial advice.
Designing your own investment portfolio
Now that you have a better understanding of what can go into a portfolio, it’s time to learn about how to structure your own.
Allocation
Allocation generally involves picking and choosing investments from a range of classes and asset types and adding them to an investment portfolio, so that you can strive for the risk/reward balance that fits your individual financial goals, objectives, risk tolerance, and investment horizon.
A common method is to set a target asset percentage allocation. This means you’ll decide how much of your portfolio should be made up of cash, equities, or real estate, for example, and express it as a percentage figure.
An example of how allocation works can be seen in your superannuation fund. Each super fund option has a different mix of assets which can include property, equities, and ETFs.
For example, growth investment funds aim to hold 85% of their assets in property or shares, and 15% in cash, according to MoneySmart. These are known as target holdings.
Monitoring
Monitoring your portfolio is an important part of maintaining a long-term investment portfolio.
To monitor your investments you’ll need to keep an eye on how they’re performing, check in on your asset allocation, make sure you’re happy with each individual investment, and keep up with market news.
The regularity with which you do this may depend on your investment timeframe.
You might decide that your investment horizon is long-term, and so you don’t need to check in on your investments every day, for example.
Rebalancing
Rebalancing occurs when you’ve monitored your portfolio and decided that something needs to change.
Professional investors ‘rebalance’ their portfolios when they deviate too far from the asset allocation.
For example, if an individual stock outperforms the others to the extent where it takes up a significant proportion of an investment portfolio, an investor may choose to sell some of the profit to ‘rebalance’ their portfolio and take some risk off the table.
Conversely, if an investor chooses a poor performing stock, but still wants to maintain exposure to an asset class, they may choose to swap in a different investment.
When rebalancing your portfolio, it’s important to decide on a timeframe that works for you.
If you're a long-term investor, you may only want to rebalance your portfolio quarterly after earnings season, for example, or even annually.
Where can you learn more?
Keep learning about investing at Spaceship Learn or MoneySmart, because the more you know, the better choices you can make.
