How to construct and manage a balanced savings and investments portfolio

POSTED: 5th July 2013
IN: Guides

The key to a balanced savings and investments portfolio is to invest and save in a variety of sectors with different elements of risk.

undefinedThis means that if one area of your portfolio is not performing well, you can hopefully make up the income or capital appreciation gap in other areas.

With inflation outpacing savings rates, it is difficult to get a real return on savings. By investing in different sectors and asset types, you can mitigate the risk of having all of your savings and investments in one investment vehicle that is not performing.

Where to invest?

If possible you should have a mixture of savings and investment types in your overall portfolio.

These should include some types of assets that allow easy-access to some of your savings should you need to access them and some that are invested for long-term growth.

Typically, this would include:

An easy-access savings account
A cash ISA
An investment ISA
Savings bonds
Stocks and shares

We will take a look at each of these individually to show how together they can produce a balanced savings and investment portfolio.

Working out what you need your money for

By deciding what you actually want to be saving and investing for, it becomes easier to select the right type of assets and investments for your overall portfolio.

Typically, an individual in their thirties who is looking to move up the property ladder, has a young family and one eye on eventual retirement, would need a variety of different types of savings and investment products to cater for all of their financial needs.

Some of their money will need to be easily accessible to pay for unexpected bills, holidays, home improvements and maintenance. An easy-access savings account and a cash ISA should be used to meet these needs, though it is important to note that once you take money out of an ISA, you can’t put it back and you lose the tax-free benefit.

For those with a lump sum to invest, when saving up for more specific one-off items  such as an extension on a property or a deposit for a new home, this could be invested in a savings bond, where the money is locked away for a longer period and a higher rate of return can be achieved.

An investment ISA and stocks and shares should be used to generate a regular modest income through interest and dividend payments.

Pensions and property can be used to invest for an individual’s retirement and long-term care needs. Property can of course also be used to generate a profit by the sale of the property in the right conditions as house prices rise or as a mixture of a capital investment and regular income if you opt to rent out a property through a buy-to-let mortgage.

By working out what you will need your money for over the course of your own and your family’s life, you are better informed to make the right decisions over what to invest in and where to put your money.

Investment options

Easy Access savings accounts – Use these to generate a return on spare funds that you think you will need to access in the short term, as you can withdraw funds without penalty.

Savings bonds – Bonds generate higher rates of return the longer you are able to invest them for. Use them to invest a lump sum when saving for a more expensive  specific goal such as a new car or extension and draw the balance out at the end of the term without penalty.

Cash ISAs – Cash ISAs can be used for short-term or medium term investments. If you are investing for a longer period, then an investment ISA or stocks and shares are more suitable as they provide a stronger possibility of higher growth than cash. Remember to switch your balance to a top-paying cash ISA that accepts transfers-in of old balances.

Investment ISAs – Invest for the medium to long-term and mix up the asset classes you invest in. Check out the current trends but a typical investment ISA might invest in a mixture of safe UK bonds, cash and gilts and some riskier companies, commodities or emerging economies. Alternatively, you can select a single global fund that will spread your investment over a mix of assets.

Stocks and shares – It depends on your knowledge of the stock market and attitude towards risk as to exactly what you invest in but stocks and shares can be a good addition to your overall portfolio because they also provide an income stream through dividend payments from companies.

Property – Over a long period, of more than 10 years, history suggests that you will not lose money by investing in property. However, it is also difficult and expensive to liquefy your funds, so you should not invest all of your money in property. Property is a long-term investment option and can be used to fund your retirement or pay for long-term care costs.

Your attitude towards risk

How you choose to invest will also be down to your attitude towards risk. Riskier investments carry the possibility of bigger returns but also carry the risk of losing some of your investment.

Most people will try and balance the overall risk by investing in assets with fixed, modest returns with a few riskier investments thrown in that could lead to stronger growth. A proportion, say 10 to 20 per cent of your overall portfolio should be in riskier assets because the potential for longer growth provides a hedge against inflation that only investing in cash and fixed rate returns cannot provide.

A general rule of thumb is that you can afford to be a bit more adventurous when you are young and investing for a long period, but as you draw closer to retirement and want to use your savings and investments for retirement, you need solid guaranteed returns.

If you are relatively young, you can afford to take bigger risks such as using your pension or your investment ISA to invest in emerging economies or riskier types of asset classes.

This is because you are investing over a 20+ year period and you can afford to see the investment go down in the early years as long as it performs strongly over the whole term.

Liquidity vs long-term investment

This is why as well as having a balance of riskier and safer assets, you also need to ensure that the money you believe you will need access to is accessible without financial penalty.

The benefits of a balanced portfolio

A balanced portfolio aims to provide the best of both worlds because it looks to cover your financial needs in the near term and well into the future.

The key to putting together a balanced savings and investment portfolio is to understand what your financial needs are, invest the right amount at the right time and for the right purpose and have a mixture of asset types so that if one area of the market is not performing, it does not affect all of your financial assets.

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