With the global markets still in recovery from COVID-19, now could be an optimal time to consider building an investment portfolio and grow your wealth. To help you on your way, the Wealth Depot team have outlined some important considerations and points to be aware of when building a sustainable investment portfolio. As always, any financial decision must align to your goals and objectives. Obtaining financial advice is paramount for making any financial decisions however with the end in mind, the right decision becomes clearer.
Understanding your risk tolerance
Crucial to building a sustainable and long-term investment portfolio is understanding how adverse you are to risk. Your capacity to take on risk can determine what type of investments are better suited to serve your needs. An individual with a higher tolerance to risk may choose to invest in assets that provide less short-term yield however greater opportunity for growth in the medium to long term. This may help grow the value of your portfolio over time. Alternatively, individuals with a lower risk tolerance may feel more comfortable investing in assets that provide steady yield but do not offer as much growth potential. Your ability to take on risk will vary depending on your financial capacity as well as your personal situation therefore it should be regularly reviewed.
Diversification
By diversifying your investment portfolio, you can benefit from spreading your investment risk across different sectors, industries, and even geographic regions. Therefore, if an industry is underperforming within your portfolio, it may be offset but another non-correlated industry that is overperforming. The idea of diversification is that your portfolio is less exposed to sudden shocks and spikes due to changes in the market or economy. This may help your portfolio provide consistent yield and growth. Investing in Exchange Traded Funds (ETFs) or Managed funds are a great way to gain diversification within your portfolio. Additionally, investing in multiple investment vehicles such as stocks, bonds, commodities, and real-estate will help minimise your risk and build a sustainable portfolio.
Setting investment goals
Setting investment goals are a great way to remember why you are investing but also to choose investments that will help achieve these goals. Your goals may vary from trying to boost your retirement savings to simply utilising an investment portfolio to cover your day to day living expense. Different goals require different investment portfolios. When trying to boost your retirement savings, you may opt for investments that provide more growth opportunity to be later captured while day to day living expenses may require a portfolio that generates higher yield.
Seek help from your Financial Adviser
A financial adviser is your greatest point of call when building an investment portfolio. A qualified financial adviser can help you throughout your investment journey, providing guidance on unfamiliar topics and leading you down the right paths that align with your goals and risk tolerance. Financial advisers can provide you with up to date financial information and investment opportunities that can take the stress out of building an investment portfolio yourself.
Rebalance your portfolio when needed
It is important to understand that once you have created an investment portfolio, it needs to be continuously reviewed and rebalanced for it to stay effective in reaching your goals. This could simply be in the form of reducing an asset that has been constantly underperforming or allocating more to an asset that is constantly overperforming. Alternatively, your adversity to risk or personal circumstances can change which will may also result in a rebalance of your portfolio. For example, you may go from being single to having a family. This could result in a heightened adversity to risk due to the added responsibility to looking after your family’s needs. As such, your portfolio would need to be rebalanced to reflect this. Rebalancing your portfolio can be a difficult process and it is recommended you consult with a financial adviser.
Sector performance over 20 years
The 2020 Vanguard Index Chart for market returns depicts how effective investment vehicles have been over the past 20 years. According to the index, if you were to invest $10,000 in Australian shares in 1989 (assuming all income was reinvested and no acquisition cost or taxes) your initial investment would be worth $130,457 in 2020. That is an average return of 8.3% p.a. The Australian share market was not the only sector that saw significant levels of growth with the domestic bond market and listed properties market both seeing average returns over 8% p.a. during the same period. These figures suggest that building an investment portfolio may provide returns that can put you in a better financial position.
