My Preferred Mix of Investments (Portfolios)
A “portfolio” is simply a collection of investments. On this page, I’ll go through how I build my easy-to-manage, low-cost portfolios, allowing for the risk level that’s appropriate for me and the amount of money I have to invest.
On this page:
Portfolios – the type I want
Why I avoid ready-made passive portfolios
How to decide what to invest in
How I use their expensive research to create my investment portfolios
Next steps
Portfolios – the type I want
I want to build investment portfolios that are passive, diversified, tax-efficient and, of course, low-cost.
- Passive not active. I prefer passive funds or trackers to include in my portfolio. They’re much cheaper and, in my opinion, much more likely to deliver a better return.
- Diversified. I want some diversification across company shares, bonds and alternatives. The idea is that such a mix of investments should reduce the losses to the overall portfolio when bad things happen (viruses, dodgy politicians or bankers sticking their hands in, etc.)
- Tax-efficient. I’m looking at both SIPPs and ISAs in equal measure because they’ve both served me well
- Low-cost. Why pay massive fees when I can pay really low fees?
Why I avoid ready-made passive portfolios
A number of banks and investment companies offer read-made portfolios, some of which only include passive funds. I’ve studied quite a few of these and I don’t like them for the following reasons:
- They involve some strange choices about how they allocate money
- They don’t distinguish between different amounts of money that you might have to invest
- They don’t allow for other investments that you might already have
- They tend to charge relatively high fees.
How to decide what to invest in
This is the ultimate question when investing.
One solution would be to copy the asset allocations of a huge investment company that has spent hundreds of thousands of pounds on research and analysis.
The trouble with this approach is that each investment company has a slightly different set of allocations according to what their fund managers and research folk think.
So, instead of relying on one investment company, why not take the average asset allocation from a range of big, reputable companies with billions of pounds-worth of investments under management?
How I use their expensive research to create my investment portfolios
I have gathered, and continue to update, data from over 80 risk-rated funds and calculated the average allocation for me as a:
- Lower-risk investor – drawn from 26 lower-risk rated funds
- Medium-risk investor – drawn from 20 medium-risk rated funds
- Higher-risk investor – drawn from 35 higher-risk rated funds
By doing this, I’ve drawn on the collective research and analysis conducted by the investment companies and for which they charge their clients high fees.
The averages threw up a few surprises:
- No gold. Not one of them makes an allocation to gold. They prefer other alternatives to shares and bonds, such as real estate and absolute return funds.
I like real estate funds as an alternative even though they sometimes will suspend trading when real estate prices move (usually downwards) quickly.
However, I hate absolute return funds because I’ve never seen one consistently deliver value for money over time. From what I’ve seen, they are an expensive folly. - Less cash. They make far lower allocations to cash than the ready-made portfolios do, averaging around 3% of the overall portfolio. That’s high, but it needs to be to cover their fees and charges.
My preference is to keep the cash allocation as low as possible but enough to ensure that all investment fees are covered i.e., no more than 1% of the overall portfolio. I don’t need more cash on top of my cash buffer: I want my investments to work hard for me. - Self-serving. They love allocating to their own funds which, funnily enough, generate the highest fees for the respective bank or investment manager.
Actually, that wasn’t a surprise, but it is worth mentioning.
Next steps
My next steps are to:
- Make sure I am in a good position to invest (see Before Investing)
- Complete the risk questionnaire
- Determine which portfolio I’m going to copy.