Building an investment portfolio is based on several factors, including your attitude to risk, your capacity to absorb loss, your timescale, and your goals. All these factors need to be taken into account when devising an investment approach which will follow a specific strategy, such as growth, income, or value investing or a combination of these.
But what do these different approaches involve, and how do you decide which one is for you?
- Growth investment portfolios
- Income investment portfolios
- Value investing
- Property investment portfolios
- Aggressive investment portfolios
- Defensive investment portfolios
- Passive investing
- Socially-responsible investment portfolios
The basic premise of a growth portfolio is that its underlying value will increase over time. It may deliver little or no regular income from dividends or interest but will instead include assets with the potential to grow over the medium to long-term.
Growth portfolios are often higher risk than income portfolios, and volatility means the assets included in them can go down as well as up. But the aim is that, over a sustained period of time, the value of the portfolio will grow.
Growth portfolios often include property as well as shares in companies that reinvest their earnings into acquisitions and expansion.
An income portfolio aims to deliver regular payments to you as opposed to increasing the value of the underlying assets.
Not that growth of those underlying assets would be a bad thing of course, but it’s not the overall aim of the investment. The idea is that the value of the portfolio is preserved while income is paid to you.
Government and company-issued bonds that pay ongoing returns are often found in income portfolios, as are shares in companies in more stable sectors – such as utilities and pharmaceuticals – that have a track record of delivering decent dividends.
This sort of portfolio can help supplement your income while you’re working or deliver alongside your pension when you retire.
However, it doesn’t mean that your portfolio can’t fall in value – as with most investments, there are risks attached.
Value investing is a strategy that involves buying shares in businesses that you believe to be undervalued.
It’s a simple concept – if you think something is going to be worth more than it currently is, it will appeal to you if you’re a value investor.
It is more of a hands-on investment strategy with fund managers scouring the market, looking for the next opportunity. Almost by definition, they buck the trend and search for investments that others aren’t attracted to at that moment, and they look for signals such as when a company’s executives increase their own shareholding.
It’s riskier than more passive investment strategies because there’s always the chance that the predictions won’t materialise.
That’s why it can be sensible to use value investing alongside other strategies so that you spread the risk through a diversified portfolio.
Property can be included in all sorts of investment strategies, but a dedicated property portfolio is one that focuses purely on real estate.
Your underlying assets should grow as property prices go up, and although there are peaks and troughs in the market, the value of property has the potential to rise over the long term. It can also provide you with income that comes through rent – either residential or commercial.
But there are some downsides to focusing exclusively on property in an investment portfolio. It can be hard to dispose of assets if you want to make a change to your investment because selling property is not as simple as selling shares.
And structural changes in society might mean that what is attractive now is less so in a few years’ time. For example, if your portfolio invests in commercial office space but there is a long-term shift to working from home, the value of (and income from) commercial premises might be hit.
Aggressive investing involves taking calculated risks in a bid to achieve higher returns. The higher the risk, though, the more chance there is of sustaining some losses along the way.
An aggressive investment portfolio can involve some value investing, assets in global markets where there is more volatility, and start-up companies that have potential but could end up going nowhere.
It may be that aggressive investing would be less suitable for older investors, such as pensioners or workers who are approaching retirement, as there is less time for them to make up any losses on gambles that don’t pay off.
But for younger adults, and even children if you’re starting to plan on their behalf, taking an aggressive approach over a number of years can result in overall returns that are higher than in a defensive investment portfolio.
The main aim of this sort of portfolio is to minimise the chance for losses during a downturn. A defensive portfolio might appeal more to an investor looking for income rather than growth, focusing on safer assets than an aggressive investor would choose.
Shares in sectors such as food and utilities that are relatively immune to economic downturns are often included in defensive portfolios, as are bonds and cash savings which are less likely to collapse in value in a downturn.
The lower volatility of a defensive portfolio can help preserve capital, but it also limits the capacity for growth.
This is a relatively low-cost way of running your investment portfolio because the hands-on involvement of a fund manager largely disappears.
A passive investment fund works by tracking certain indexes, such as a particular stockmarket. That means if one particular share tanks, you’re not going to be overly exposed to it – but it also means you aren’t in a position to benefit as much if another company’s share price soars.
The simplicity of passive investing can be attractive to some people – it means they find it easier to understand their investments. And although many investors prefer to allow a manager to actively manage their portfolio, a passive investment portfolio takes away the risk that a bad fund manager delivers underperformance.
A focus on environmental, social and corporate governance (ESG) investing means every investment in your portfolio will be measured against real-world benchmarks.
If you opt for an ESG portfolio, it will invest only in companies that meet high standards in terms of their environmental impact and social behaviour, both internal and external. You’ll also be investing only in companies that meet high standards of corporate governance, in terms of how they make decisions and follow the law.
ESG investing usually steers clear of certain sectors, such as gambling, tobacco, and weapons. It is possible to incorporate ESG principles into other investment portfolio strategies, too.
Speak to us
Our experienced financial planners can help guide you towards the investment strategy that’s right for you, taking into account factors such as your long-term goals and your attitude to risk.
We have access to investment funds that have varying levels of risk, and take a multi-asset approach, meaning you can opt for a selection of funds in your portfolio. These can take a mixture of approaches (a combination of income and growth, for example) or they can all be based on the same approach, but this will be tailored to your individual goals and risk tolerance.
To find out more, contact our team of independent financial advisers on 01603 967967.
Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.