Quick Beginner’s Guide (Investment Portfolios)

This quick beginner’s guide to building an investment portfolio will help take you from a novice investor with little to no experience to a confident and informed wealth builder.

Please note that any information supplied on this website is for entertainment purposes only and should not be taken as financial advice. Any reader should do their own research and/or consult with a qualified financial advisor.

What is an Investment Portfolio?

An investment portfolio is a collection of financial assets.

There are several different asset classes, but for today, we will concentrate on stocks and bonds.

There are also alternative assets such as commodities, property, and cryptocurrencies, which can also make up a portfolio.

This portfolio can grow over time as the investor contributes more, the assets grow in value, and dividends are distributed to the investor.

It is also crucial to reduce your debt burden and save money as this can improve your chances of accumulating wealth.

What Four Factors Drive Investment Returns?

There are four factors which contribute to the returns of any portfolio:

Amount Contributed: The more funds you invest, the greater the potential for returns.
Compounding Frequency: This aspect refers to how often interest/growth is applied to assets or investments (usually daily, monthly, quarterly or annually).
Growth Rate: This factor is influenced by the performance of the individual assets in your portfolio, such as stocks, bonds, or other investment vehicles. Higher growth rates can lead to accelerated portfolio growth. However, it’s important to note that higher returns can come with increased risk. Different asset classes have varying levels of volatility, and finding the right balance between risk and return is crucial in optimising the growth of a portfolio.
Time: The longer your money remains invested, the more time it has to benefit from compounding, where the returns generated on your initial investment start to generate their returns. Even if the initial growth seems gradual, the compounding effect becomes more pronounced over an extended period. This is why starting to invest early and staying invested for the long term is often emphasised in financial planning.

Beginner’s Guide Section 1

Lump Sum Investing vs Averaging In

There are two main ways to approach contributing to your portfolio.

The first is lump sum investing. If you have a sizable amount of cash and you think it is a favourable time to invest, you can contribute a large sum to your investments.

Of all these cons, the emotional aspect is perhaps the most critical as an investor who gets caught up in the emotions of the market will be more likely to invest when the market is at its peak and euphoria is at its highest.

The second is averaging in.

Averaging into the market means you contribute regularly to the portfolio (usually every week or month).

You are also consistent with the amount you invest.

Beginner investors should average into the market monthly as it builds an investment habit. You can easily set up a direct debit through your broker. Automation is probably the most important reason why beginner investors should automate their investments as it builds a consistent habit and reinforces the notion of “paying yourself first”.

However, it is always worth waiting for critical moments where you can lump sum invest. For instance, during the COVID crisis, I took the opportunity to invest heavily in a few companies at the low points which resulted in huge returns.

If there is a market crash, it can present a great opportunity to gain outsized returns.

Beginner’s Guide Section 2

Selecting a Broker

I used Hargreaves Landowne for many years as my broker, but I have recently my entire ISA portfolio to Trading 2-1-2.

For a complete beginner, I would seriously consider Vanguard or Trading 2-1-2 (no SIPP currently) as your main broker for your stocks and shares ISA and SIPP (Self-Invested Personal Pension).

The reasons are as follows:

Vanguard and Trading 2-1-2 offer a good selection of funds and the fees are reasonable (the most important reason)
Vanguard and Trading 2-1-2 is less confusing than many other brokers
Vanguard and Trading 2-1-2 are highly reputable and have a long history in the industry

I have created an investment pie which can provide you with a starting point for your investment journey if you have a long time horizon:

https://www.trading212.com/pies/l7rQMBihdK1F79tUOCkkm39SLb25

Use my link and both you and I get a free share:

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A LISA Broker

In the UK, we have a Lifetime ISA where the government tops up our account by 25% of its value.

If you’re looking for a great LISA broker, I would probably recommend AJ Bell or Hargreaves Landowne.

I am most comfortable with Hargreaves Lansdowne, but AJ Bell certainly intrigues me as it works out less expensive than Hargreaves Lansdowne for my particular portfolio as I am an active investor.

Hargreaves Lansdowne is a great platform for a beginner as there are no fees for trading funds, but you need to be aware that there are some very costly platform fees.

Broker Fees

Unfortunately, there are many fees that you need to be aware of when you sign up to use any broker.

When using stock brokers or online investment platforms in the UK, be aware of the following fees:

Commission Fees: Charges for buying and selling stocks.
Stamp Duty: Government tax on share purchases (currently 0.5%).
Currency Conversion Fees: Charges for trading in currencies other than GBP.
Platform or Account Fees: Periodic charges based on the value of held assets.
Inactivity Fees: Charges for low or no trading activity.
ISA Charges: Fees specific to trading within an Individual Savings Account.
SIPP Fees: Charges for setting up and maintaining a Self-Invested Personal Pension.
Research and Data Fees: Charges for premium research and market data access.
Dividend Reinvestment Fees: Charges for automatic reinvestment of dividends.
Corporate Action Fees: Charges for handling corporate actions.
Transfer Fees: Charges for transferring your account to another brokerage.
Live Data Fees: Charges for real-time market data.
ADR/GDR Conversion Fees: Fees for converting American or Global Depositary Receipts.
Options Trading Fees: Charges for trading options contracts.

Review the specific fee schedule of your chosen platform, considering the services and resources offered. The industry trend is toward reduced or eliminated fees, especially with commission-free trading platforms.

Beginner’s Guide Section 3

Fund Investment vs Individual Stocks

Novice investors should stray away from investing in individual stocks.

If you have no experience reading company accounts and do not have time to learn the skills required then it makes more sense to invest in funds.

Funds are simply collections of securities that are aimed to fulfil a certain purpose. In this beginner’s guide, I won’t go too deep into the different types of funds, but here are some that you may come across:

Mutual Funds
Exchange-traded funds (ETFs)
Index Funds
Hedge Funds
Money Market Funds
Bond Funds
Equity Funds (Stock Funds)
Sector Funds
Real Estate Investment Trusts (REITs)
Commodity Funds
Target-Date Funds
Fund of Funds
Socially Responsible Funds (SRI)

What’s the Difference Between Accumulation and Income Funds?

There are often at least two versions of funds: accumulation and income.

An accumulation fund will take any dividends and reinvest them back into the fund. An income fund will distribute the dividends back to you.

Honestly, unless you are looking specifically to reallocate dividends to different funds or live off the dividend income, I believe that the beginner investor should always choose the accumulation fund. It is the most low-cost way to build your wealth.

Beginner’s Guide Section 4

The Specifics of Fund Investment

If you want to have a lazy strategy, where you will not touch your portfolio, then a target date fund will make the most sense.

A target date fund involves you selecting the fund with your retirement date on it. For instance, if you want to retire in 2055, then you can select the Vanguard Target Retirement 2055 Fund.

The fund will automatically reallocate your portfolio over time to include more fixed-income securities such as bonds. In theory, this will mean that you are at less risk of huge drops in your portfolio as you near your retirement age.

In this beginner’s guide to building an investment portfolio, I would also suggest an accumulation fund, as this will allow your portfolio to build efficiently without you having to worry about reinvesting those dividends.

Fees on Funds

I believe that fees on funds are a very important metric for any investor to understand. If you understand the investment to be an exercise in compound growth, then fees should be considered depreciation that eats away at your returns over time.

I would always suggest filtering funds by the fees, and selecting your portfolio as you wish.

Here is an example of a fund with an excellent deal for the investor (screenshot from HL):

VANGUARD US EQUITY INDEX ACCUMULATION (GBP):

On the other hand, here is a fund I wouldn’t buy. You can see the number of fees. There is even an initial charge so you lose money before you even start.

ALQUITY ASIA CLASS Y – ACCUMULATION (GBP)

The second fund would have to have a monumental level of performance to make up for the fees that you have to pay.

Beginner’s Guide Section 5

A Suggested Portfolio in 2024

Here is what I have been doing within my portfolio:

Fund #1 S&P 500 UCITS ETF (VUAG) (Allocation 30%)

Exposure to the biggest stock market in the world is something that I would want in my portfolio. I believe that the index is overvalued, but I couldn’t bet against the US in the long term.

Ordinary I would assign a larger weighting to this holding, but as it is so richly valued, I don’t think it presents the best long-term growth prospects. However, if there were a significant drop in valuation, I would certainly allocate a greater percentage to it. I also think as the fee is 0.1%, it presents good value in this regard.

Fund #2 FTSE Emerging Markets UCITS ETF (VFEG) (Allocation 40%)

The emerging markets are a little out of favour at the moment, but I think they represent some value. Although there is more risk and a higher fee of 0.22%, there may be a lot more potential for growth moving forward.

Many of the stock markets in the emerging regions are undervalued by traditional metrics.

Fund #3 Global Bond Index Fund (VANGRSA) (Allocation 20%)

As bond yields are likely set to fall, I think that some allocation to bonds could represent some opportunity from 2024 onwards. Ideally, I would not invest at all in bonds and have everything in stocks.

However, at the moment, I believe stocks to be relatively overvalued, and it makes sense to have a little in bonds. Also, if there is a market crash, I can always reallocate my bond holdings to stocks.

Cash (Allocation 10%)

Arguably, I should have more in cash, as the market is so overvalued and there may be opportunities that arise shortly. However, I believe my bond positions can somewhat absorb short-term drops.

Also, as I have many dividend stocks and REITs (Real Estate Investment Trusts) in my portfolio, I can easily build up cash within my portfolio for investment.

Conclusion

So that draws to a close my beginner’s guide to building an investment portfolio. I hope you found some of these tips helpful and good luck in your investment journey.

Let me know in the comments what portfolio strategies you are adopting.

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