One question that I have been asked lots of times in the last week is “how to pick and create a portfolio”. This is subjective to your age, time, and investment horizon.
When working on portfolios I usually go for a textbook approach depending on your time frame for the investment horizon and risk profile. The definition of what stocks and shares you should have depends on your risk levels and do differ on each side of the Atlantic in the percentage amount of international equity and alternative investments. We will keep it simple and generalize with both the American and European models.
Level of risk when creating a portfolio
First, you need to ask yourself, what is your risk profile? This will mainly be down to how long you are looking to invest, how much you can risk losing & what your aspirations are as well as your investment knowledge and experience. Use the link below to find out your risk profile, it’s good to do this for your investments.
https://www.surveymonkey.com/r/SB36VNM
This will put you into set levels or risk category that is most applicable for you and use the models as a guideline. Although if you are doing this with a financial advisor or by yourself, you or the advisor should take deeper consideration about your personal situation & if you have a pension or own property or other investments.
Conservative risk profile
If you have done the test and have a low-risk profile. This is normally for older personnel with pension funds that want something stable and looking for a medium-term investment (5-10 years). Here is an example of a conservative portfolio:
Table 1: Conservative risk profile, 70% allocation to fixed interest, 20% equity and 10% cash money markets
As you see in the table (above) shows that this is where the majority of your money allocated to fixed income securities are mainly bonds, that give a general return and are lower risk than equity. With fixed income bonds, can be either corporate or government bonds with the latter being more conservative (mostly).
The typical investor in this portfolio would want to keep their money well persevered and get around 3-4% of growth per year average, this normally beats inflation in most developed countries (CPI stands at around 2% in most developed countries as of 2019) thus giving a net return of just over 2% in real terms. It’s not the most glamorous return, however, if you have a sum of money and want to preserve the wealth and maintain it in the medium to long term with some growth, it is an appropriate option.
Here are some of the portfolios that have been used previously for conservative investors:
*Note this is for GBP, it is not applicable for USD or EUR but is used as an indication and was a model portfolio that was previously designed for an individual for his/her personal circumstances so it will not be applicable to anyone else*
Table 2: Shows the funds used in the conservative portfolio
| Funds Name | Fund type | Percentage | YTD return (as of Dec 2019) |
| Vanguard UK Government bonds index (Acc) | Fixed Interest (Onshore bonds) | 25% | 1.18% |
| M&G Global Macro | Fixed Interest (Offshore bonds) | 20% | 4.59% |
| Fidelity Money Builder income (Acc) GBP | Fixed Interest (Company bonds onshore) | 15% | 9.69% |
| Investec Diversified Income (GBP) | Mixed Assets (30% equities 70% global bonds) | 10% | 4.88% |
| Fundsmith Global Equity (Acc) | Equity (global) | 25% | 24.64% |
| Cash | Cash | 5% | 0% |
As shown from the table, this was an example of a U.K client with money in GBP, as you can see it nearly fits the assets allocation for a conservative risk profile used in the chart above. I prefer to have less money devoted to cash as some of the equity and mixed assets classes will hold a proportion of their fund in cash (varying to what they expect from the market).
As well as this it has several, fixed interests across a number of asset classes thus giving an alternative to the home country’s government bonds with a range of European and American with a minority of developing countries, such as Brazil and Indonesia in the Investec bond. These normally give higher returns than the developed country-specific bonds. This is seen in the M&G global macro bond returns compared to the Fidelity U.K bond returns.
The equity in this particular portfolio is higher than that that has been advised, however, underline that for a risk-reward trade-off and the client was happy to do so. If you are looking after a pension fund or want something more stable you may consider putting more into fixed interest across a range of different sectors.
Aggressive portfolio
The aggressive risk is normally for someone who wants to get higher than average returns, this is looking more into the longer-term period and higher returns and can be used for a younger investor. This will take the ideology of looking for higher returns of around 6-8% per year & the asset allocation that I personally use (but does vary for each individual) is as follows.
Table 3: Shows the allocation of an aggressive portfolio
As seen from the chart above, this has a majority in equities and I have taken it down into sub-sections on how the asset allocation has been distributed. Again this is for a U.K client so therefore the majority of the assets that take place are done in global equities, this is done in mainly the U.S, Western Europe, and in large market capitalization companies.
The same to a lesser degree with U.K equities. With the emerging markets, this takes around 20% of the portfolio and give access to the developing markets to give a higher growth than that of the developed indexes, this selection has picked a highly rated Asian bond by JP Morgan giving access to developed large companies in Singapore and fast-growing countries in Indonesia, Thailand & Vietnam.
This particular portfolio is on the aggressive end and was done for a specific need, however, if wanted to make it less aggressive I would add more bonds and for the alternative, I would go into a gold ETF to give some diversification from equities.
Here is a GBP portfolio that was made from this, when selecting the funds I went for those with a high market capitalisation & made sure it was a major name and 3+ star-rated for every fund by at least 2 independent rating agencies with the global equity looking 4/5 stars. I used Morningstar and S&P, but I do prefer Morningstar.
Table 4: Shows the rating and the fund type rating and size of the fund selected with the return to date.
| Fund Name | Fund Type | Morningstar Rating | Fund Size (Million) | Year to Date return (2019) | Why selected |
| JP Morgan fund Asian equity | Emerging Markets | 5 | 841 (USD) | 9.27% | An above-rated fund with a presence in South East Asia market withholding in major cooperation in the region for diversification and growth |
| Black Rock Euro bonds funds | Fixed Interest | 5 | 5513 (Euros) | 8.06% | Another larger fund from a well-respected company with a good track record and highly rated with stability for the fixed interest and diversification from equities. |
| Fund Smith Global Equity | Global Equity | 5 | 17546 (GBP) | 27.85% | A good global equity fund with a track record in performance and manager. highly rated and a good range in global developed markets. |
| Fidelity Global Health care fund | Specialist/ Alternative | 5 | 909 (Eur) | 24.49% | An alternative investment vehicle with large market cap exposure. With a majority of its holding in developed markets in Eurozone (Inc U.K) Americas and Australia |
| iShares Physical Gold | Alternative | N/A | 6765 (USD) | Diversification to the equity model |
JP Morgan Asian fund GBP Acc:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000MGGB
iShares gold Physical GBP:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000XNXU
Fidelity Global Health care fund Acc GBP fund:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000SX23
Blackrock Global Euro bond 14 GBP:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000XNXU
Fundsmith Global Equity Acc:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LK2Q
Table 5: Showing the portfolio weighting
| Portfolio Weighting | Percentage |
| Fundsmith Global Equity | 37% |
| BlackRock Eurobonds | 10% |
| Ishares Physical Gold | 10% |
| Fidelity Health Care fund | 20% |
| JP Morgan Asian funds | 20% |
| Cash | 3% |
Table 6 shows a pie chart of the weighting
Disclaimer
*Please note again that this is just an example of a portfolio and how we have selected for an induvial and the model based on personal aspirations. This may not be applicable for you and would seek financial advice before making any decision on investing.*
If you have any questions about creating your own portfolio, if you want any advice or to have a report on your situation, please email me at info@investmentsforexpats.com
